Sunday night for Nikkei and Brent
Asian trading opened in the red on Sunday night. Nikkei futures were down 2 percent at 63,260 against a cash close of 64,011. S&P 500 futures lost 0.5 percent and Nasdaq futures fell 1.0 percent. In the same hours Brent rose 3.1 percent to 107.84 dollars a barrel and US crude added 2.8 percent to 102.85 dollars.[1]
Nothing new sits on the policy path. Pricing implies an 86 percent chance of a 25 basis point Federal Reserve increase on Wednesday, a 76 percent chance of a Bank of Japan move to 1.25 percent on Friday, and the Bank of England holding at 3.75 percent on Thursday. As I wrote in this column yesterday, a hike that was 90 percent priced is why a hot core reading lifted stocks; the same logic runs the other way tonight.[1], [4]
The input is supply, and the shock is long
The fresh input sits on the supply side. Saudi Arabia shut the East-West oil pipeline from Abqaiq, near the Gulf, to Yanbu on the Red Sea after several drones coming from Iraq hit the line in the Riyadh and Medina regions; an energy ministry official said the stop was a precaution, and Baghdad confirmed the attacks came from its territory. That roughly 1,200 kilometre line is the route the kingdom uses to bypass the Strait of Hormuz, and exports through its Red Sea port have more than doubled since the war began. A bypass around a choke point is exactly the capacity the tape watches, and for now it is idle.[2]
The mechanism joining the two sides runs through prices, and this time a central banker spelled it out. Christine Lagarde told Ouest-France that euro-area inflation stands at 3.3 per cent against a 2 per cent target, that the shock will last longer than expected, and that higher energy costs drive all prices higher; she tied it to the Middle East conflict and to the destruction of refining capacity, especially in Russia, and said the bank expects the pressure on energy prices to continue. Read that against Sunday night. Futures already hold Wednesday's 25 basis points; what was being priced with Brent at 107.84 dollars was the chance that a longer energy shock shifts the inflation path up beyond Wednesday. The thin alternative stays on the table: Sunday-night volume is light, and part of the move could be position closing that owes nothing to inflation.[3], [1], [2]
This week's Fed test
Only the closes after the decisions separate a durable repricing from a thin Sunday-night reaction. The Federal Reserve decides on Wednesday, the Bank of England on Thursday and the Bank of Japan on Friday. If Brent holds above 107.84 dollars after all three and S&P 500 futures do not recover their 0.5 percent Sunday-night loss, the move is consistent with a durable repricing. Otherwise the thin-liquidity reading gains ground.[1]