Falling Oil prices rattle global markets

Oil, energy stocks and commodity-linked currencies are falling in markets around the world after talks in Qatar between major producers to freeze oil output collapsed yesterday.

The renewed volatility in the resources sector is damping risk appetite more broadly — though the intense angst of earlier in the session has faded — leaving major equity gauges under pressure, while boosting perceived havens such as the yen and government bonds.

Hopes for a deal to hold crude oil production at January’s level were scuppered by Saudi Arabia’s insistence that Iran, which had refused to participate in the freeze as it rebuilds oil exports after years of sanctions, should be part of any agreement.

Brent crude, the international benchmark, is off its session lows but still down 2.2 per cent at $42.17 a barrel, while West Texas Intermediate, the US marker, is 3.2 per cent lower at $39.08. Prices had been down as much as 7 per cent and 6.8 per cent, respectively.

“The failure of the Doha talks to agree anything serves to underscore the ongoing global supply/demand imbalance and which the fall-off in US shale oil output does little to correct,” said analysts at National Australia Bank.

Since hitting a 12-year low below $30 a barrel in January, the price of Brent has recovered by almost 50 per cent, partly on hopes that big oil producers would be able to reach some form of deal to tackle global oversupply.

The rebound had eased fears not just over the health of the resources sector but banks’ exposure to energy-linked loans. Higher oil prices had also reduced concerns among investors about the fiscal positions of oil producing nations and that some may need to sell financial assets to raise cash.

Consequently, the fallout from Doha has hit trader investor confidence – with energy sensitive assets in particular feeling the pain.

The pan-European Stoxx 600 equity index, which had been down more than 1 per cent, is off 0.3 per cent as the oil & gas sector sheds 1.7 per cent. US index futures suggest the S&P 500 will lose 0.3 per cent to 2,075.

Australia’s S&P ASX 200, which has a chunky resources sector weighting, fell 0.4 per cent and the Australian dollar is down 0.3 per cent at US$0.7696, but had shed as much as 1.7 per cent in early trading.

The Canadian dollar is retreating 0.7 per cent and the Malaysian ringgit, which has tracked the rebound in oil prices since January, was one of the worst-performing Asian currencies, down 0.6 per cent.

The “risk off” mood across markets is encouraging traders to seek traditional safety plays, such as highly rated government bonds. The yield on the US 10-year note, which moves inversely to the bond price, is down one basis point to 1.74 per cent, while equivalent maturity German Bunds are slipping 1bp to 0.13 per cent.

Gold is not seeing much “haven” buying, however, the yellow metal up just $2 at $1,236 an ounce as the dollar index dips 0.1 per cent to 94.57 reflecting the euro up 0.2 per cent versus the buck at $1.1302.

The Japanese stock market has been a notable underpeformer, hurt not just by the hit to global sentiment from the oil price plunge but also worries about the latest earthquake and a stronger yen, which is up 0.3 per cent at ¥108.39 per dollar. The yen tends to firm after earthquakes in Japan because traders think investors will repatriate funds.

The Nikkei 225 fell 3.4 per cent with financial stocks in retreat. Concerns about business and supply chain disruptions have surfaced since locations on the island of Kyushu were struck by an earthquake on Thursday and a series of aftershocks since.

Shares in insurers fell and banks lost ground because the quake is seen marginally increasing the chances that the Bank of Japan may ease policy further at its meeting later this month — potentially pushing interest rates deeper into negative territory.

On Monday, the yield on Japan’s benchmark 10-year government bond fell as low as -0.123 per cent, just two-tenths of a basis point away from a record low reached in mid-March.

In China, the Shanghai Composite lost 1.4 per cent despite further evidence of economic recovery as property prices in the nation’s top 70 cities rose an average of 4.9 per cent year-on-year in March.

Last week, official gross domestic product data showed that the economy grew 6.7 per cent in the March quarter compared with a year earlier, and exports increased more than expected last month.