What oil price surge means for Pakistan’s economy

Our Correspondent   & / News Desk
Saturday, Apr 13, 2024

ISLAMABAD: Oil prices in the international market witnessed a surge on Friday in the aftermath of reports of tensions between Israel and Iran. It hit a record level of $91 per barrel, resulting in far reaching impact for the economies of oil importing countries, especially for Pakistan.

Oil prices jumped to the highest level since October last as Israel-Iran tensions escalated, threatening disruption in a region that accounts a third of the world’s crude output.

The prices of gold also witnessed an upsurge in the market.

It will have far reaching impact for economies like Pakistan because they depend on oil imports. If the oil prices surge, they will have to require more dollars to import crude oil. It will also result in raising inflationary pressures.

Meanwhile, reports that Israel is bracing for an imminent attack by Iran sparked a scramble for safety across markets on Friday, inspiring traders to dump stocks in favour of Treasury bonds, gold and the US dollar.

The selloff was initially driven by a report in the Wall Street Journal that said Israel was bracing for an Iranian strike that could arrive as soon as Friday or Saturday. It bore a strong resemblance to the market reaction on April 4, which caused stocks to plunge in afternoon trading on a similar warning from Israel.

“This Iranian situation definitely brings another dimension to the overriding narrative right now,” said James St Aubin, Chief Investment Officer at Sierra Mutual Funds, in a phone interview with MarketWatch. “I think it’s responsible for the market action we’re seeing today.”

By early afternoon in New York, the S&P 500 SPX was on track for its biggest weekly drop since January, while the Nasdaq Composite COMP erased gains from earlier in the week that had sent it to a record high on Thursday.

Meanwhile, the Dow Jones Industrial Average DJIA was down nearly 500 points, leaving the blue-chip gauge on track for its longest losing streak since June and its worst two-week percentage drop since March 2023, according to Dow Jones Market Data.

Market strategists blamed the timing of the report for exacerbating stocks’ losses from earlier in the week, explaining that many traders don’t want to risk holding on to stocks over the weekend should Iran follow through on its threats.

To be sure, softness in stocks this week has been driven by a mosaic of catalysts, from a hotter-than-expected inflation report, to investors’ tepid response to big-bank earnings.

While stocks sank, demand for options-market hedges skyrocketed — causing the Cboe Volatility Index VIX, otherwise known as the Vix or Wall Street’s “fear gauge,” to soar toward its highest close since Oct. 30, according to Dow Jones Market Data. The index was up more than 25% in recent trade, on track for its biggest daily increase since November 2021.

The surging Vix briefly pushed the value of front-month Vix futures contracts expiring later this month above that of contracts expiring in May, causing the Vix futures curve to become inverted for the first time since February, according to Tyler Richey, co-editor of Sevens Report Research.

An inverted Vix futures curve is a sign that traders are bracing for stocks to continue sliding in the weeks ahead, Richey said.

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Investors also sought succor in bonds, driving down treasury yields, which move inversely to prices. The yield on the 10-year treasury note BX:TMUBMUSD10Y was off by 6 basis points at 4.51 percent, according to FactSet data. The US dollar continued to climb despite the drop in treasury yields, with the ICE US Dollar Index DXY, a closely watched gauge of the dollar’s value against a basket of its main rivals, up 0.6 percent at 105.95 and on track for its best week in 17 months. Market strategists described this disconnect between the dollar and yields as a hallmark of the safety trade.

The impact was also felt in commodity markets, where gold futures rose to fresh all-time highs. The most active gold contract was up $35.30, or 1.5 percent, at $2,407 an ounce. And on the oil front, US-traded West Texas Intermediate Crude CL00, 0.51 percent futures rose 1.5 percent to $86.23 a barrel, erasing most of a decline from earlier in the week.

Geopolitics rarely have such a dramatic impact on stocks. Even selloffs tied to major historical events like the Sept. 11 attacks have typically reversed within a few months.

That’s because corporate earnings are largely left intact, market strategists said. But strategists at BofA Global Research identified several ways that a conflict in the Middle East could hurt U.S. multinationals.

In a report released shortly after Hamas’ Oct. 7 attack on Israel, they cited potential disruptions to international trade, as well as the possibility that Europe’s economy could be hurt by a spike in energy prices similar to what occurred following Russia’s invasion of Ukraine.

Still, some investors warned that Friday’s selloff would likely be quickly reversed, just as the April 4 selloff was.

Michael Lebowitz, portfolio manager at RIA Advisors, said headlines warning of an imminent Iranian strike were likely part of a broader negotiating strategy. He cited the fact that stocks had become overbought following a strong five-month rally as the real reason for Friday’s selloff.

During a conversation with MarketWatch last week, Steve Sosnick, chief market strategist at Interactive Brokers, highlighted the tendency for traders to get carried away when geopolitical tensions escalate.

Iran is reportedly threatening to retaliate against Israel after the latter bombed an Iranian consulate in Damascus, Syria, last week, killing several top Iranian officials.