Oil prices continue to head south

Oil prices continue to head south. Brent crude fell by around $5 to just under $93 p/b yesterday, and is down another couple of dollars overnight following comments by Donald Trump, who said momentum is building towards ending the conflict in Iran. Lower oil prices are providing a supportive backdrop for equity markets. Stocks rallied yesterday, led by US indices which continue to recover from last Thursday’s sharp falls. The ‘risk on’ environment is weighing on the dollar. It has lost some further ground to the euro and sterling to trade at around $1.1250 and $1.3450 respectively this morning. EURGBP is again little changed as it continues to hover around the £0.8350 level.

Brent crude oil prices are now down almost $27 from their recent peak at the end of October, with some $14 of this decline occurring since last Tuesday’s midterm elections in the US.  The US Vice-President, JD Vance, blamed the heavy defeat suffered by Republicans in the midterms squarely on the Iran war, while Donald Trump is now indicating that an end to the conflict may be in sight (though one can never be sure with Trump). Lower oil prices are providing some support for equity markets. US stocks rose yesterday with the main indices gaining between 2% and 3%, while European markets closed between 1%-2% higher, largely reversing Friday’s falls. In government bond markets, US yields rose by 3-6bps, with the biggest increase again occurring at the short-end of the curve, while German and UK yields were, respectively, marginally higher and marginally lower on the day. French 10-year bonds outperformed their German equivalents , with yields falling slightly and spreads tightening a little.

ECB Chief Economist Philip Lane say “if the information set we have in December is exactly the same as the information set today, then I think it would be prudent indeed to hike (interest rates).” He notes that while “oil prices can move around a lot”, there’s “more to come in terms of peak inflation”, with headline inflation likely to be running “a little bit” above 4% early next year, obviously well ahead of the 2% target.

Fed’s Goolsbee says “the AI data center build-out is, to my eye, starting to look more just like old-fashioned demand overheating” in the economy, noting that central banks typically need to respond to overheating in an “aggressive” way (by raising interest rates).

For the day ahead, the key economic data release is the October CPI inflation report in the US, with the consensus expecting headline and core prices to have increased by 0.3% and 0.2% month-on-month respectively last month, after increasing by 0.6% and 0.3% respectively in September. A number of Fed, ECB and Bank of England members are scheduled to speak during the course of the day.