Surging oil prices weigh on world markets

Sky-high oil prices weighed on markets Monday as investors worried that the increases could choke off a burgeoning economic recovery, particularly in the U.S.

Sentiment in the markets has been buoyed in recent weeks by a seeming calm in Europe’s debt crisis and a run of strong U.S. economic data, particularly with regard to jobs.

One side-effect of the positive U.S. economic news flow has been to put upward pressure on oil prices. Despite a modest retreat back below $109 (U.S.) a barrel Monday, the benchmark New York rate is trading way above where it was just a month ago. Last Friday, it hit $109.77 a barrel, its highest close since May 3. Crude has soared from $96 earlier this month as stronger U.S. economic indicators bolstered investor confidence.

“At this stage of the global economic cycle, with activity in many of the major advanced economies sluggish, a rise in oil prices threatens to intensify the recessionary prospects facing these economies while, at the same time, raising the headline rates of inflation,” said Neil MacKinnon, global macro strategist at VTB Capital.

That fear has weighed on markets Monday.

In Europe, the FTSE 100 index of leading British shares was down 0.7 per cent at 5,894 while Germany’s DAX fell 1.1 per cent to 6,789. The CAC-40 in France fell 1 per cent to 3,432.

Wall Street was poised for losses at the open too — Dow futures were down 0.5 per cent at 1,357 while the broader Standard & Poor’s 500 futures fell 0.4 per cent to 12,908.

Despite Monday’s retreat, many of the world’s leading indexes are back at levels they were trading at before last summer’s massive sell-off. U.S. markets are faring even better and have even broken through levels last seen before the collapse of U.S. investment bank Lehman Brothers in September 2008.

While developments surrounding oil prices will continue to be monitored, investors will be watching developments over Europe’s debt crisis closely, especially on Wednesday when the European Central Bank offers its second round of super-cheap long-term loans to banks.

Its first so-called long-term refinancing operation last December has been widely credited for helping to calm markets in 2012.

And with Greece pressing ahead with demands to get its hands on a €130-billion ($174-billion U.S.) bailout, market concerns over an imminent default by the country have diminished, and that’s helped the euro spike too to near 11-week highs.

On Monday, it was down 0.3 per cent at $1.3419 (U.S.).

Last Friday, Greece made a formal offer to creditors to swap their Greek government bonds for new ones in another step toward knocking €107-billion off its debts. The swap is part of a deal to prevent Greece from defaulting on a debt payment due next month.

The Greek Finance Ministry issued the formal offer to banks and other investment funds under which creditors are called on to accept losses of more than half the face value of the bonds they hold in return for new bonds with longer maturities.

Later Monday, German lawmakers are expected to back the new Greek rescue package by a wide margin, despite unease over whether Athens will need more help in the future.

Over the weekend, Germany was pressed by countries within the Group of 20 leading industrial and developing nations to increase the size of Europe’s bailout facility and investors will be looking to see if there are any signs during the Parliamentary debate of an easing in the Germany position.

Earlier in Asia, Japan’s Nikkei 225 index ended down 0.1 per cent at 9,633.9, giving up gains posted earlier in the day. Hong Kong’s Hang Seng fell 0.8 per cent to 21,217.86 and South Korea’s Kospi lost 1.4 per cent to 1,991.16.

But mainland Chinese shares advanced for a seventh straight trading day as hopes for an easing of restrictions on housing purchases help drive the rally. The benchmark Shanghai Composite Index added 0.3 per cent to 2,447.06 and the Shenzhen Composite Index gained 0.3 per cent to 975.62.

You can return to the main Market News page, or press the Back button on your browser.