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Oil price slides as tensions grow between US and China

US House of Representatives Speaker Nancy Pelosi visits the parliament in Taipei, Taiwan this week. Photo: Reuters

US House of Representatives Speaker Nancy Pelosi visits the parliament in Taipei, Taiwan this week. Photo: Reuters

Published Aug 5, 2022


The global oil price fell to its lowest since the war on Ukraine yesterday, shunning growing tensions between the US and China after China fired missiles in “unprecedented” drills around Taiwan.

This as markets were rattled.

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The price of Brent crude oil fell to below $93 (R1 554) per barrel yesterday, closing on the lowest level since February when Russia invaded Ukraine.

Oil producing countries agreed to raise oil output by a meagre 100 000 barrels a day in September and warned of “severely limited” spare capacity.

TreasuryONE currency strategist Andre Cilliers said the pumping of more oil in September, along with a surprise jump in US oil inventories and gasoline stocks, had pushed the price of Brent crude oil further down.

“The oil price has been under pressure over the last few weeks on the back of recession-driven demand concerns,” Cilliers said.

Investors yesterday were also coming to terms that higher interest rates, rising inflation and the global economic slowdown will heavily impact demand.

The Bank of England yesterday raised its interest rate by 50 basis points to 1.75 percent, the sixth consecutive rate hike, and pushing borrowing costs to the highest level since 2009 as inflation is expected to rise to 13.3 percent in October.

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The UK is also now projected to enter a recession in the fourth quarter of 2022, which would last for five quarters.

“There has been mounting pressure from political quarters and the press regarding the scale of the rate increase, with many considering that it will punish businesses and families, while having a limited impact in terms of controlling escalating prices,” said Ricardo Evangelista, senior analyst at ActivTrades.

Rand and JSE

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Meanwhile, markets were a little rattled, but recovered well enough after the Eastern Military Command of China’s People’s Liberation Army conducted long-range live-fire precision strike drills against specific targets in the eastern part of the Taiwan Strait.

The planned military exercises come in response to the controversial visit of US House Speaker Nancy Pelosi to Taiwan as part of a congressional delegation tour of the Indo-Pacific region as the US has ignored warnings from Chinese officials.

By 5pm the rand was at R16.71 against the dollar, 16 cents up from the prior day at the same time.

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Warren Venketas, an analyst at forex trading firm IG, said yesterday, “What could be supporting the rand could be the fact that China’s services PMI (purchasing managers index) data beat expectations which could garner support for currencies from commodity exporting countries with close ties to China simply based on an upbeat print.

On the JSE, the all share index gained index 0.16 percent to end the day at 68 717.02 points.

Meanwhile, Reza Hendrickse, a portfolio manager at PPS Investments, said yesterday in a second quarter market analysis that the South African equity market, as measured by the FTSE/JSE Capped SWIX, fell sharply this quarter (-10.6 percent).

Resources stocks were the hardest hit (-21.9 percent) as commodity prices corrected, but financials also came under pressure (-15.6 percent) on economic concerns, while industrials (-2.6 percent) proved relatively more resilient alongside the weaker rand. Among interest-sensitive asset classes, SA listed property fell in line with the equity market (- 12.1percent).

“In terms of South African equity, our view has remained unchanged, and we still consider being overweight to be appropriate in multi-asset portfolios. The SA equity market is still attractively valued (trading on a single digit forward P/E multiple). Cheap valuations are widespread and not just limited to resources,” Hendrickse said.

He said on a relative basis, South African valuations were also favourable compared to offshore markets.

“Although South African equity is cheap, and this points to the likelihood of promising medium- to long-term returns, it is possible for the market to become cheaper over the short term should a deterioration in the global macroeconomic environment affect the earnings outlook negatively, or should sentiment deteriorate further,” Hendrickse said.