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European stock markets rose on Monday, led by shares of energy producers after the international oil price hit its highest in almost three years.
The Europe Stoxx 600 gained 0.5 per cent in early dealings as its energy sub-index rose 1.3 per cent. The UK’s FTSE 100 rose 0.6 per cent.
Brent crude, the international oil benchmark, added 1.2 per cent to $79.12 a barrel, past its last peak in July and touching its highest level since October 2018. West Texas Intermediate, the US oil marker, gained 1.4 per cent to $75.09, its highest price since the summer.
The price of Brent has advanced by almost 9 per cent so far this month. Opec, the group of oil-producing nations, forecast that demand for the commodity next year would slightly exceed 2019 levels as economies recovered from the shocks of the Covid-19 pandemic and rising vaccination rates spurred a travel industry recovery.
“The current global oil supply-demand deficit is larger than we [had] expected,” analysts at Goldman Sachs commented in a research note, forecasting that Brent would reach $90 a barrel by the end of the year.
Analysts have warned that a continued rise in oil prices could inflame fears of persistent inflation that might prompt central banks to raise interest rates. This could, in turn, make stock markets vulnerable as companies and households cut spending.
The US Federal Reserve and the Bank of England last week signalled moves towards tightening monetary policy, while Norway’s central bank became the first in the G10 group of advanced economies to raise rates in the pandemic era.
“Central banks are turning more hawkish” after prioritising monetary stimulus since March 2020, said Supriya Menon, senior multi-asset strategist at Pictet.
This added to “a confluence of risks that markets are having to navigate,” Menon said, including a potential slowdown of China’s economy after the Beijing government clamped down on debt and speculation in the nation’s all-important property sector.
Evergrande, the world’s most indebted property developer, missed a payment due on bonds held by offshore investors last week. Fears of global contagion from Evergrande’s woes and a funding crunch from other Chinese homebuilders hit world stock markets early last week, before receding as investors banked on Beijing authorities easing monetary policy and ensuring any housing market slowdown would be orderly.
Still, Beijing “was caught in a conflict of trying to reduce credit within the economy to abate inflation but provide enough to the banks to ensure a soft deleveraging of endangered companies, developers and banks,” Jefferies strategist Sean Darby said.
With land sales to homebuilders accounting for more than 50 per cent of government revenues and housing making up 70 to 80 per cent of household wealth, Darby added, a fall in Chinese property prices “must be one of the major concerns for investors.”
The yield on the 10-year US Treasury note, which moves inversely to the price of the benchmark government debt security, fell 0.02 percentage points to 1.446 per cent. This yield briefly hit its highest since July on Friday after the Federal Reserve indicated that a growing number of its policymakers expected to raise rates in 2022.
In Asia, Hong Kong’s Hang Seng share index and Tokyo’s Nikkei 225 traded flat. The dollar index, which tracks the US currency against six others, was also steady.
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