Asian shares experienced a cautious opening on Monday as a spike in oil prices breaking a ‘three-year record’ triggered inflation fears. Market participants feel the spike has the potential to exacerbate the hawkish turn recently adopted by a number of major central banks.

Oil surpassed its highest from July owing to the global output disruptions which made energy companies pull out huge amounts of crude from inventories. In addition to this, Europe pushed costs up as a result of the natural gas shortage in the continent.

US crude increased 71 cents to $74.69, while Brent rose another 62 cents to $78.71 a barrel on Monday.

Analysts at Goldman Sachs noted, “We forecast that this rally will continue, with our year-end Brent forecast of $90/bbl vs. $80/bbl previously,”.

“The current global oil supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above-consensus forecast,” they added.

This type of increase has the potential to stoke speculation around global inflation proving to be longer-lasting than previously thought and lead to a rushed end of super-cheap money, supporting reflation trades in stocks of the energy and banking sector while hurting bond prices.

The broadest index of Asia-Pacific shares (.MIAPJ0000PUS) apart from Japan under MSCI appeared flat, following three consecutive weeks of experiencing losses.

In Japan, market participants are expecting an increase in fiscal stimulus post the election of a new Prime minister which was reflected in the 0.4% gain on Japan’s Nikkei (.N225).

Nasdaq and S&P 500 futures increased by 0.1% and 0.3% respectively.

Last week, China’s property giant Evergrande (3333. HK) failed to make a payment on offshore bonds which has another payment due in the coming few days. This has further aggravated the uncertainty revolving around the real estate group.

Despite, Beijing injecting cash into the financial system, stocks in Hong Kong are still under immense pressure.

Analysts at JPMorgan noted “We expect policymakers in China to allow deleveraging of property sector debt to take hold with an eye to reducing moral hazard, but are confident that they will actively manage the restructuring and effectively limit financial spillovers,”

Another important aspect under consideration is the US fiscal policy with a vote on a $1 trillion infrastructure bill by the House of Representatives this week, alongside the funding of federal agencies due on Sept. 30 which could potentially lead to another partial government shutdown in three years.

US Federal Reserve Speeches are lined up for the week led by Chair Jerome Powell alongside a large number of other events.

The recent hawkish shift by the central banks of a number of leading centres including the United States resulted in bond yields teetering last week.

In the midst of talks regarding the revival of the reflation trade as global markets brace themselves for the end of super-cheap money, the 10-year Treasury peaked at 1.46% which is its highest since July.  

The US dollar got further fortified with the rise in yields, especially against the currencies of emerging markets which are in competition with Treasuries for global funding.

The US dollar stood at 93.292 against a bundle of currencies, slightly lower than the 10-month top of 93.734 in August.

It further improved against the yen after reaching a noteworthy chart barrier of 110.79.  The dollar has not done this well since early July.

As investors contemplated the consequences of a center-left Social Democrats run the government after its victory during Sunday’s election, the euro remained steady at $1.1719

The 16 year conservative-dominated rule by Angela Merkel ended after the Social Democrats claimed victory.

Analysts at CBA wrote in a note, “The likelihood of a political shift to the left suggests Germany’s fiscal stance could become less of a drag on the economy over the next few years than is currently projected, this would ultimately benefit the euro.”

The impact of the US dollar on gold led to it being held at $1,748 barely above a six-week low of $1,738.


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