World stocks edge lower on geopolitical tensions

London — Oil shed some of its massive gains on Tuesday as the US flagged the possible release of crude reserves, while stocks edged lower as investors remained on the sidelines ahead of this week’s US Federal Reserve meeting.

Investors were non-committal ahead of an expected interest rate cut from the Fed on Wednesday and the next round of US-China trade talks on Thursday.

European shares opened lower, with energy stocks giving up gains as crude prices eased. The pan-European Stoxx 600 index dropped 0.2%.

MSCI’s All-Country World index, which tracks shares across 47 countries, was down 0.1% on the day. Earlier in Asia, MSCI’s broadest index of Asia-Pacific shares excluding Japan was down 0.66%. Chinese shares fell 1.07%, while Hong Kong shares slumped 1.18%.

US stocks futures were flat to slightly lower, indicating subdued open on Wall Street later.

Brent crude oil, the international benchmark, fell 0.1% to $68.96 a barrel on Tuesday. On Monday, it surged as much as 14.6% for its biggest one-day percentage gain since at least 1988. US West Texas Intermediate (WTI) futures were down 0.87% to $62.25 a barrel following a 14.7% surge on Monday, the biggest one-day since December 2008.

Saturday’s attack on Saudi oil facilities has halved the kingdom’s oil output, creating the biggest disruption to global oil supplies in absolute terms since the overthrow of the Iranian Shah in 1979, International Energy Agency (EIA) data show.

US President Donald Trump has authorised the release of emergency crude stockpiles if needed, which could ease some upward pressure on crude futures. Trump said on Monday it looked like Iran was behind the attacks but stressed that he did not want to go to war, striking a slightly less bellicose tone than his initial reaction.

Iran has rejected US charges that it is behind the attacks. Tension between the two countries was already running high over Iran’s suspected ambitions to assemble nuclear weapons. The strikes in Saudi Arabia are likely to raise regional tensions even further.

Spare capacity

“Although Saudi Arabia’s spare capacity and US strategic petroleum reserves could plug some of the lost output, where oil trades in the near term will be influenced by how long it takes for Saudi production to fully recover,” said Lukman Otunuga, research analyst at FXTM. “It is this concern over negative supply shocks amid geopolitical tensions that should keep oil prices buoyed in the short term.”

Gold prices were steady at $1,497.48 an ounce.

The yield on benchmark 10-year US treasury notes fell slightly to 1.8292%. Eurozone government debt yields edged lower as geopolitical uncertainty stemming from the attack on Saudi underpinned a cautious tone in bond markets.

The dollar was flat against a basket of peer currencies.

The Fed is expected to cut interest rates at a policy meeting ending on Wednesday, which could put pressure on the Bank of Japan to ease policy at a meeting the following day.

Trump said on Monday on Twitter that the Fed should enact a “big interest rate drop, stimulus”. However, historical precedent and the US’s changing energy diet suggest the Fed is likely to stick with an expected quarter of a point cut and go no further.

Futures contracts tied to the Fed’s policy rate imply a 64.9% chance that the US central bank will cut its benchmark overnight lending rate by a quarter of a percentage point to a range of 1.75% to 2% on Wednesday.

Trump said on Monday that the US has reached initial trade agreements with Japan, but traders are also focused on the US-China trade war.

“In the next week, positive developments on Brexit and/or Iran have the potential to move markets higher from here. It shows why staying strategically invested in equities is important,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “But with scope for central banks to disappoint and global growth continuing to slow, we see little reason to change our tactically more cautious stance.”

Deputy-level talks between the US and China are scheduled to start in Washington on Thursday, paving the way for high-level talks next month aimed at resolving a bitter trade row that has dragged on for more than a year.

Reuters