Brent tops $90 per barrel

February payrolls were much weaker than expected for February. The headline number was -92k, lower than the 55k expected for Feb, and the 130k job increases for January. The unemployment rate ticked up slightly to 4.4% from 4.3%, and US job losses were concentrated in the education and healthcare sector and the leisure and hospitality sector, two sectors that saw strong jobs growth in January.

This reversal in the strength of the US labour market has led to some skepticism that the jobs data is noisy as it works through disruptions caused by winter storms across the US in January and February. It may take a couple of months before we get a clearer picture about the actual strength of the US labour market, as today’s NFP report diverged from other employment indicators like the ISM services and manufacturing sector surveys for February.

Payrolls have mild effect on markets as geopolitical risks loom large

The initial market reaction saw Treasury yields fall and the dollar back away from daily highs. However, those moves were quickly reversed after the oil price took another leg higher after Kuwait joined Qatar and said that it was halting energy production. Donald Trump also brushed off hopes that mediation was taking place to end this war in the Middle East, instead he said that there would be no end until an ‘unconditional surrender’ of the Iranian regime took place, which seems unlikely in the near term.

This has dashed hopes that the conflict will be averted quickly, and the oil price has continued its push back towards $90, Brent crude is higher by 6% on the day and is now above $90 per barrel, and there is not much to stop it from hitting $100 per barrel in the near term. The relentless rise has also seen WTI crude rose by 9% today. Until the oil price stabilizes it’s hard to see how stock markets and bond prices can recover.

US assets more protected during this crisis

Global equity markets are extending their declines at the US open. US equities are also joining the sell off, the Nasdaq is lower by 1.5% and the S&P 500 is down 1.4% . European stock indices are also getting hit as risk is taken off the table into the end of the week. The Eurostoxx index is down more than 2% today, and on a currency adjusted basis is down a whopping 9.8% in the past week. The FTSE 100 is lower by nearly 7% this week on a currency adjusted basis, and even its plethora of big energy names and defense stocks only gives it a slim margin of resilience compared to its European counterparts.

US stocks may be lower on Friday, but US assets are far more protected from this crisis than elsewhere. Gains in yields are lower and losses in stocks are also moderate compared to their European counterparts for this week.

Huge energy gains for the week

The markets can only really price in what they see in front of them at this stage. For now, it doesn’t matter about earnings or fundamentals, and even a weaker than expected payrolls report is not having a ‘bad news is good news’ effect on markets, as Fed rate cut hopes are thwarted by higher energy prices.

In the last 5 days, the WTI crude price is up 30%, Brent crude is higher by 26% and Natural Gas is higher by 60%. This is a disaster for the global economy, especially for Europe, according to traders, with European assets selling off at a faster rate than elsewhere. The FTSE 100 is set to wipe out all of its gains from February, and the 10-year Gilt yield is higher by 33bps this week, and is up 16bps today now that Brent has hit the $90 per barrel level.

Why are UK bonds selling off more than elsewhere?

The rapid repricing of monetary policy expectations, and the UK’s history of high energy prices means that UK Gilts are particularly vulnerable to this energy price spike. The selloff in Gilts has been worse than the selloff in UK stocks this week. The risk is that equity traders align with bond traders, which could spell trouble for stocks if this conflict continues.

Watch weekend newsflow

Heightened geopolitical tensions mean that traders are cutting risk exposure into the weekend. Newsflow remains key to market sentiment. While it appears unlikely after Trump’s comments from earlier, if there is a deescalation in this war over the weekend, then risk sentiment could recover quickly. We think that energy prices will maintain a risk premium even if the fighting stops, as oil and gas infrastructure in the Gulf remains out of action, which could take weeks or months to repair. If the war continues to escalate over the weekend, we think that markets will continue to sell off, especially after the rapid increase in oil prices today.

Chart 1: Brent tops $90 per barrel

Source: XTB and Bloomberg