An overnight surge in oil prices has boosted Australian energy stocks, leading to a better-than-expected start for the local share market.
Key points:
- The Fed is expected to lift US interest rates by 50 basis point (0.5 per cent) in May
- Oil prices are back above $US100 a barrel, after surging by more than 6pc
- The EU has yet to embargo Russian oil, but the option remains on the table
The ASX 200 index was up 0.2 per cent to 7,472 points, by 10:25am AEST on Wednesday.
This was despite a weak lead from Wall Street as the latest data showed US consumer prices rising at their fastest pace in 40 years.
Energy was the best performing Australian sector, driven by the rising share price of Santos (+2pc) and Woodside Petroleum (+1.7pc), as crude oil prices rebounded above $US100 a barrel.
Shares in A2 Milk (+2pc), Blackmores (+1.8pc), Rio Tinto (+1.2pc) and Graincorp (+1pc) also made solid gains in morning trade.
The Australian dollar was trading at 74.5 US cents after rising by 0.3 per cent.
Although Wall Street began its day higher, investor sentiment turned negative in afternoon trade.
This was shortly after US Federal Reserve governor Lael Brainard made some remarks about the central bank needing to “expeditiously” grapple with decades-high inflation.
Overnight, the S&P 500 closed 0.3 per cent lower at 4,398 points.
The Nasdaq Composite fell 0.3 per cent to 13,372, while the Dow Jones Industrial Average dropped 0.3 per cent to 34,220.”
The comments coming out from Fed officials have been more hawkish than the markets have anticipated,” said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago.
“[Brainard] has generally been nondescript, but now she’s more forceful in her commentary, and that’s getting people to sit up and take notice.”
Aggressive rate hikes to tame inflation
US consumer prices jumped 8.5 per cent compared to a year ago, according to the Labor Department’s figures for March. It was the fastest rise in the cost of living since December 1981.
Russia’s war against Ukraine boosted the cost of petrol to record highs, cementing the case for an aggressive 50 basis point (0.5 per cent) interest rate hike from the US Federal Reserve next month.
The Fed will conduct a series of interest rate hikes and begin reducing its massive bond holdings as soon as June to help bring down inflation, Ms Brainard said on Tuesday (local time).
Getting inflation back down toward the Fed’s 2 per cent goal is the central bank’s “most important task,” the Fed governor told the Wall Street Journal in an interview.
“In terms of exactly what the right pace of that set of increases in the policy rate [is] from meeting to meeting, I don’t really want to focus on that,” Ms Brainard said.
Several of her fellow policymakers, including Fed chair Jerome Powell, have signaled they may need to jack up interest rates by bigger-than-usual increments to get policy more quickly to a neutral rate of about 2.4 per cent so borrowing costs will at least no longer be stimulating growth.
The Fed raised rates last month to a target range (0.25 to 0.5 per cent), its first increase in three years, and said more rate hikes were ahead.
Oil prices ‘vulnerable to a major shock’
Oil prices surged overnight, as lockdowns eased in Shanghai and the Organization of the Petroleum Exporting Countries (OPEC) warned it would be impossible to replace potential supply losses from Russia.
Brent crude futures jumped 6.6 per cent to $US104.93 a barrel, while US West Texas Intermediate surged 6.7 per cent to $US100.60.
Both oil benchmarks fell sharply (by around 4 per cent) earlier this week.
Shanghai said more than 7,000 residential units had been classified as lower-risk areas after reporting no new infections for 14 days. Districts have been announcing which compounds can be opened up.
OPEC lowered its Russian liquids production forecast by 530,000 barrels per day (bpd) for 2022, but also cut its forecast for growth in world oil demand, citing the impact of Russia’s invasion of Ukraine, soaring crude prices and resurgence of the pandemic in China.
“The oil market is still vulnerable to a major shock if Russian energy is sanctioned, and that risk remains on the table,” wrote Edward Moya, a senior market analyst with OANDA.
The European Union has yet to embargo Russian oil, but some foreign ministers have said the option is on the table.
ABC/Reuters
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