Talk that Saudi Arabia has its sights on $80-$100 a barrel oil again ignited a fierce rally in commodities and resource stocks on Thursday, though the potential boost to inflation globally put some pressure on fixed-income assets.
It was set to be the strongest day for the commodity complex in eight months as Brent crude futures climbed past $74 a barrel after a near 3 percent jump overnight.
The surge came on a Reuters report that OPEC’s new price hawk Saudi Arabia would be happy for crude to rise to $80 or even $100, a sign Riyadh will seek no changes to a supply-cutting deal even though the agreement’s original target is now within sight.
“The Saudis and their colleagues in OPEC need higher oil for their fiscal positions and the Kingdom is on a bold – and costly – reform program,” said Greg McKenna, chief market strategist at CFD and FX provider AxiTrader.
The leap in oil combined with fears that sanctions on Russia could hit supplies of other commodities to light a fire under the entire sector. Nickel jumped the most in 6-1/2 years on talk Nornickel – the world’s second-biggest producer of the metal – could be targeted.
Aluminum prices reached their highest since 2011, its raw material alumina touched an all-time peak, while iron ore leapt 5 percent. Such increases, if sustained, could fuel inflationary pressures and investors hedged by selling sovereign bonds.
Yields on U.S. two-year Treasuries stood at levels last visited in 2008 at 2.43 percent and 10-year German yields went above 0.55 percent for the first time in almost a month.
“If oil prices were to move toward $80 a barrel and euro weakened a bit, there could be some inflation pressure,” said Rabobank’s head of macro strategy Elwin de Groot.
“That usually has a negative impact on spending and could do here, especially if it comes on the back of these trade and geopolitical tensions.”
Resource stocks were the big winners, driving Chinese blue chips up 1.1 percent. MSCI’s broadest index of Asia-Pacific shares outside Japan added 0.9 percent, with energy up over 2.6 percent.
Japan’s Nikkei faded late in the day to end up 0.15 percent, but basic materials and utilities both climbed more than 2 percent.
Industrial and commodities-focused stocks also led the pack in London, Paris, Frankfurt and Milan though the pan-regionally STOXX 600 was showing some signs of fatigue after a two-day rally had taken it to a six-week high.
The bullish sentiment in markets comes amid wider optimism about economic growth. The global economy is expected to expand this year at its fastest pace since 2010, the latest Reuters polls of over 500 economists worldwide suggest, but trade protectionism could quickly slow it down.
Investors were also relieved that no new U.S. demands on trade came out of a summit between Japanese Prime Minister Shinzo Abe and U.S. President Donald Trump.
E-Mini futures for the S&P 500 were pointing to a steady start in New York later.
Wall Street had also seen hefty gains in the energy and industrial indexes, though that was offset by softness in sectors such as consumer staples and financials.
IBM’s 7.5 percent drop was the biggest drag on the S&P after the technology company’s quarterly profit margins missed Wall Street targets.
The Dow ended down 0.16 percent, while the S&P 500 gained 0.08 percent and the Nasdaq 0.19 percent.
In currency markets, the U.S. dollar remained rangebound with its index a fraction firmer at 89.669. It gained a touch on the yen to 107.46 yen, but stayed short of recent peaks at 107.78.
The euro hovered at $1.2383, within striking distance of the week’s top of $1.2413, while Turkey’s lira fell back 0.6 percent having had its best day in more than a year on Wednesday after President Tayyip Erdogan declared early elections.
“The conventional wisdom is that (political) stability, even if it is not the form that you might choose – allows investment flows to continue.” said Tom Clarke, a cross-asset co-portfolio manager at William Blair Funds.
The strength in commodity prices helped the Australian dollar easily weather unexpectedly soft jobs data, with employment rising by a meager 4,900 in March.
Figures out from New Zealand also showed annual inflation there had slowed to just 1.1 percent in the first quarter, underlining expectations that interest rates would remain at record lows for many more months to come.