The rice stock market is calm even if crude oil soars
Original Japanese article: https://r.nikkei.com/article/DGXMZO49866050X10C19A9000000/?s=5
Japanese to English translation provided to us by:
Sara Sekine
Nikkei Inc.
1325 Avenue of the Americas, Suite 2400
New York, NY 10019
In the US stock market on 16th, the Dow Jones Industrial Average pulled back for the first time in nine business days and closed at $ 27,076, down $142 from the end of last week. Sector selection prevailed in response to a surge in crude oil prices following an attack on the Saudi Arabian oil facility on September 14. Energy stock rose while airline, transportation and retail stocks weakened due to concerns over higher transportation cost and gasoline prices.
Oil facilities of Saudi Aramco, Saudi national petroleum company, were attacked by drones on September 14. In the New York market on Monday, WTI oil futures rose sharply by 15%. Meanwhile, the US stock market saw less movement with Dow only down 0.5%. Why is the US stock market relatively calm despite increasing geopolitical risks?
The development of the attack and the consequent oil price spike adds an element to US growth and is not necessarily an event that increases the risk of a recession, says David Kotok of Cumberland Advisors. He says the event will accelerate exploration and production of energy in the United States and contribute to US defense sector as Saudi moves to strengthen its defense. Going forward, he sees US stock reaching record high by the end of the year, accompanied by sector rotation of energy sector strengthening against sectors like consumer discretionary.
Behind the confidence in the US stock market lies the recent structural change in oil market. According to the International Energy Agency, US oil production has doubled over the past 10 years thanks to the expanding shale gas production, and in June the US temporarily surpassed Saudi Arabia and became the world's largest oil exporter. Kotok points out that during the oil crises in 1990 and 1973-1974, the United States was an importer of crude oil, but now it is an exporter and the impact on the US economy is smaller than the past.
RBC Capital Markets also points out that 75% of Aramco's export goes to Asia and this outage is likely to impact Asian countries like China who are more dependent on imports from Saudi Arabia.
On the other hand, the negative impact on the US economy of a sharp rise in crude oil prices cannot be non-existent. If crude oil prices continue to rise and lead to inflation pressure, the US economy and the Fed monetary policy may be affected. Wells Fargo's senior economist Sarah House points out that increased geopolitical risks by the attack may keep prices elevated even if Saudi oil production returns to normal.
Of particular concern is that US companies and consumers have already begun to be affected by the increased costs due to tariffs imposed on Chinese products. Many of the intermediate goods imported from China are subject to 30% tariffs due to trade disputes between the United States and China, and since September, the tariffs have been extended to consumer goods that have been avoided until recently. House warns that consumers are now facing a dual-hit to real spending power from the increasing core inflation pressure due to the tariffs and the lack of deflationary factor from low energy costs.
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