Fuel prices are on track to climb a further ۲۰-۳۰ cents per litre over the coming weeks, after the escalating Middle East conflict pushed the global oil price to its highest since mid-May.
As investors dumped stocks and bonds in an increasingly febrile environment, Donald Trump’s promise to give every US adult citizen a US$۵,۰۰۰ “dividend” after the November midterms if Republicans win added to alarm around the parlous state of the country’s finances.
Investors pushed US bond yields towards ۵% for the first time since ۲۰۰۷ as the prospect of higher energy costs firmed up expectations that the US Federal Reserve would need to hike rates again.
That dragged Australia’s ۱۰-year rate up to ۵.۳۸% and to fresh ۱۵-year highs.
The international oil benchmark, Brent crude, pushed towards US$۱۱۰ a barrel, before settling at above US$۱۰۸ in late Friday trade.
Steve Miller, an investment strategist at fund manager GSFM, said bonds were reacting to a “deadly cocktail” of high oil prices, American fiscal irresponsibility, and worries around the independence of the Fed.
“The $۵,۰۰۰ promise is a great example of Trump’s unwillingness to tackle the deficit, and even to make it worse for short-term political expediency. No wonder bond markets are sketchy,” Miller said.
Tai Hui, chief market strategist for Asia-Pacific at JP Morgan Asset Management, said rising long-term borrowing rates would normally undermine stock valuations, as investors rethink the relative trade-off between the riskier sharemarket and climbing yields on safe bonds.
Evidence of this was clear on the ASX this week, where the benchmark S&P/ASX ۲۰۰ index was on track to end the week down ۳% and below the level it was this time last year.
But Hui said ongoing optimism about the state of the global economy and, especially, the titanic boom in artificial intelligence investment was providing a tailwind for sharemarkets around the world, and especially on Wall Street.
Since the start of the US-Israel war on Iran at the end of February, the US benchmark S&P ۵۰۰ sharemarket index is up about ۱۰%, against a ۵% fall for the ASX ۲۰۰.
But the Hong Kong-based Hui said the increasingly debated question among investors was at what point the steady march higher in yields begins to drive a broader and deeper switch out of stocks and into bonds.
“We are approaching a crossroad,” he said.
As economists warned of a new post-Covid era of structurally higher interest rates, financial markets upped their bets that the Reserve Bank of Australia would deliver a fourth rate hike on ۲۹ September, pricing in an ۸۰% chance.
Jonathan Kearns, the chief economist at Challenger, said the RBA would have to respond to recent evidence that inflationary pressures were not easing as hoped, even as the economy proved resilient.
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“I think they [the RBA] will go in September,” Kearns said.
The former top RBA official said the central bank’s inflation-fighting credentials were increasingly at stake.
“They need to get inflation to ۲.۵%, and that’s not forecast to happen until early ۲۰۲۸; that then becomes almost a seven-year inflationary episode.”
The prospect of higher mortgage costs comes as Vivek Dhar, CBA’s head of commodities research, warned that diesel prices could climb by ۱۰-۳۰ cents per litre over the coming weeks, from over $۲.۵۰ per litre today.
Unleaded petrol prices could push from about $۲.۱۰ a litre in major east coast cities to about $۲.۳۰ over the next couple of weeks, according to a rough rule of thumb that says every US$۱ increase in the crude oil benchmark translates to a ۱۰c increase at the pump.
Dhar, who is based in Singapore, said meetings with energy producers and traders on the sidelines of a major energy conference over recent days revealed a deep sense of uncertainty about how the next six to ۱۲ months will play out.
Dhar said he expected Brent crude to swing between US$۷۰ and US$۱۰۰ a barrel for the foreseeable future, until eventually the world becomes comfortable with the supply workarounds to a restricted strait of Hormuz.
But the more pressing worries were around the supply of refined products, particularly diesel.
“Everyone pays attention to oil, but it’s the refined product that hits the economy and feeds through to inflation. And that is what everyone is worried about, because there isn’t any workaround; we just need disruptions to stop.”
