Source: Wall Street News
Author: Cho Chak-hee
The sharp rise in oil prices may disrupt the current downward trend in European and American inflation, causing European and American central banks to maintain high interest rates for a longer period of time. Currently, rising oil prices have strengthened the US dollar. The market expects most currencies to remain weak, but some oil-exporting countries' currencies are expected to be slightly impacted. In terms of US stocks, the leading sector is expected to rotate from technology stocks to energy stocks.
The recent surge in oil prices is forcing investors to reconsider their asset layout.
Since the Fed will announce the results of the latest interest rate meeting this Wednesday, energy and its potential impact on inflation and economic growth has become one of the hottest topics of discussion in the market.
Some analysts believe that one of the most obvious effects of the current surge in oil prices is that a sharp rise in oil prices will disrupt the downward trend in inflation and prevent the Fed from cutting interest rates as soon as possible as the market hopes.
The sharp rise in oil prices is creating a gap between the foreign exchange of oil importers and exporters. Due to the impact of declining oil supply, almost all currencies weakened against the US dollar. In particular, the euro, yen, Swedish krona, and other Middle Eastern currencies performed weakly, while a few other oil exporters, such as Brazil and Canada, may be able to withstand the wider turmoil.
Another type of asset hit by high oil prices is aviation stocks. Higher fuel prices are squeezing airline profits, causing investors to sell stocks in aviation, logistics and other industries. The S&P Super Composite Aviation Index, which consists of 10 companies, has fallen 20% since mid-July, making it one of the hardest hit US stock sectors in recent months.
By contrast, European energy companies are expected to benefit significantly from high oil prices. For the UK blue-chip index FTSE 100, energy stocks are a particularly big driving force. Although the industry's weight in the index is only about 13%, its 2022 earnings account for 26% of the index.
In US stocks, energy stocks are once again a popular trade on Wall Street, and strategists at Goldman Sachs and J.P. Morgan suggest investors increase their holdings.
Some analysts believe that in the next few months, the energy sector will perform well, triggering a new trend of investing in large oil stocks that are underperforming in stock prices. There will even be sector rotation in US stocks, and the leading sector will hopefully shift from technology stocks to energy stocks.
On the bond market side, US and European bond yields have been rising, partly because investors consider that interest rates will have to stay high for a longer period of time. In Germany, there is growing concern that expensive energy will damage the country's industry. The two-year German Treasury yield has jumped to 3.2%, compared to 2.9% in early August.