Crude prices surge as market volatility spikes on fears of looming energy crisis

The escalating war between the US, Iran and Israel has sparked a surge in oil prices and market volatility.

Energy prices surge as war in the Middle East escalates

It’s a volatile start to the week as the war in the Middle East drags on and arguably escalates. All sides have doubled down and increasingly regional actors are being dragged in. The strategic implications are multi-faceted. But the economic ones can be reduced to oil markets and supply shocks. Increasingly, energy supply is being threatened, mostly due to disrupted trade flow through the Strait of Hormuz, but now increasingly because of attacks on energy infrastructure as a tactic of war. After a surge in energy prices on Friday there’s the expectation that that move will be extended  into the new week. The supply shock is weighing on asset prices globally but especially in Asia, with the knock-on effect to inflation expectations, interest rates, economic growth and valuations probably still to be fully priced-in yet.

(Source: Trading View)
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Surging energy prices complicate US jobs, inflation outlook

The inflation angle is going to become more relevant this week because the economic data – to the extent the markets will be focussing on it as the chaos of war escalates – will be dominated by US inflation numbers. CPI and the PCE Index will be published on Wednesday and Friday respectively. CPI, which relates to February, is tipped to show core inflation is steady at 2.5%. But the PCE Index, which is the Fed’s chosen gauge but relates to January, rose to 3.1%. There is evidence that inflation is not only sticky and reanchored above target but possibly moving away from it. The stakes are being raised by the conflict in the Middle East which could exacerbate the situation.

Another factor weighing on market sentiment and raising the stakes going into inflation data was a very weak Non-Farm Payrolls report. The data shocked and revealed a net loss of 92,000 jobs last month and a lift in the unemployment rate to 4.4%. A trend of weaker hiring has been underway for some time. But this is the first release in a while where jobs growth has been negative before revisions. There is the fear that once revisions come through the picture could be bleaker. Even greater than the risk the US economy is slowing and the Fed is behind the curve, is that there’s a fear in the markets that with upside risks to inflation persisting, the central bank may be limited in its ability to cut and provide support.

(Source: Trading Economics)