The shock of the group’s decision to cut production by more than 1 million barrels a day came as a shock to global markets on Monday. It resonated across asset classes as investors rushed to brace for the risk that inflationary pressures could be more persistent than previously thought.
The dollar extended gains for a second day, gaining against most of the Group of Ten currencies. The Norwegian krone was little changed after an earlier rally on the expected benefit of higher energy prices for the Scandinavian country.
The policy-relevant two-year government bond yield rose eight basis points, pushing it back above 4.1% as traders weighed the announcement from OPEC+, which earlier assured it would keep supply steady. Treasuries ended the first quarter on Friday with yields falling as investors bet that rate cuts are on the horizon.
Futures for the S&P 500 fell 0.3% and those for the Nasdaq 100 0.6% as Friday’s upbeat sentiment faded. The S&P 500 was up 3.5% last week, its strongest since November, while the tech-heavy Nasdaq 100 posted its biggest quarterly gain since June 2020.
“This could be a rude awakening for equity investors as markets imply a Goldilocks view of reduced discount rates but no recession,” said Ronald Temple, chief market strategist at Lazard Ltd. in NYC. “The OPEC+ production cut is another reminder that the inflationary genie is not back in the bottle.”
Goldman Sachs Group Inc revised its price forecast for Brent crude due to the production cut and forecast it to reach $95 a barrel by year-end and $100 in December 2024, analysts including Daan Struyven and Callum Bruce wrote in a note.
Stocks rose in Japan and Australia, with Asian energy stocks gaining. However, semiconductor stocks slipped after Beijing introduced one Security Check of imports from Micron Technology Inc.
Stocks in Hong Kong fell slightly, while those in Shanghai posted a small gain. Caixin manufacturing PMI data on Monday showed a stronger-than-expected decline, suggesting some weakness in China’s economic recovery.
Monday’s bumpy start to trading and fears of rising prices contrast with the optimistic tone last week, which emerged as turmoil in the banking sector eased and a key measure of US inflation slowed.
Excluding food and energy, the Federal Reserve prefers inflation gauge – the price index for personal consumption spending – rose 0.3% in February, slightly below the median estimate. This indicated that the Fed could be close to ending its rate hike campaign. The PCE price index rose 5% year-on-year, slowing from January but well above the Fed’s 2% target.
The OPEC+ cut coupled with increased energy demand from China will increase the risk of prolonged inflation, Lazard’s Temple said. “It also likely limits the room central banks could have to ease monetary policy even if the economy is slowing,” he added.
“We are now probably about to re-enter a very short-term downturn,” Paul Gambles, co-founder and managing partner of MBMG Group, told Bloomberg Television. “We’ve had a year of fairly irresponsible policy leaders and all the damage they’ve done is now starting to show.”
Elsewhere in the markets, gold and bitcoin declined. Cryptocurrency did it best quarter since March 2021 with an increase of around 70% in the first three months of this year. BM/DM
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