On Thursday, oil prices and energy shares swept higher after OPEC settled to reduce crude production to clear a surplus, while the greenback and bond yields increase abruptly on prospects that resulting inflationary pressures will lead to higher interest rates.
On Wednesday, the Organization of the Petroleum Exporting Countries (OPEC) agreed to its first production cut since 2008, finally taking action having seen global oil prices decline by more than half in the last two years.
Non-OPEC Russia will also join production cuts for the first time in 15 years.
U.S. crude oil climbed more than 9% overnight to a one-month peak just shy of $50.00 a barrel. The deals were a fraction lower at $49.42 a barrel early on Thursday. Brent crude was just below $52.00 a barrel after recovering to a six-week peak of $52.37.
The jump in oil prices added to inflation anticipations in the United States, which were already high on expectations that president-elect Donald Trump would adopt reflationary policies using a large fiscal stimulus.
As an outcome, U.S. Treasuries restarted their rout, with prices slipping and yields spiking, to send the dollar recovering against its peers. The yield on 30-year bonds (US30YT=RR), which are most sensitive to inflation eroding their value, increase approximately 9 basis points to 2.39% overnight, taking it back towards 14-month high marked the previous week.
“The reflation trade continues to work in earnest, this time Trump has taken a back seat and OPEC and Russia have taken the initiative and lit the fuse under the oil price,” wrote Chris Weston, chief market strategist at IG in Melbourne.
“The consensus was that we would get some sort of loose agreement from the collective that kept oil supported, but left the market asking many more questions. What we have seen, however, has been real meat on the bone.”
If the rebound in oil prices gathers pace after the Organization of the Petroleum Exporting Countries (OPEC) deal was projected to have a broad implication on the worldwide economy.
Brent is off the 12-year decline of $27 per barrel marked in January but still not more than half of where they were in 2014.
Economists expect an additional recovery in crude to signify well for oil exporting economies, though possibly easing deflationary pressures in developed economies locked in a battle against declining prices.
OPEC’s production cut is also perceived as an advantage for U.S. shale producers, competitor to the oil cartel. On Wednesday, the S&P energy index jumped nearly almost 5% .
The greenback moved a 9-1/2-month peak of 114.830 yen, adding to increase made overnight when it increase 1.8%.
“Steven Mnuchin, President-elect Donald Trump’s pick to lead the U.S. Treasury, gave no hint of any unease at the strong dollar in his first remarks since being named for the job, giving traders fresh impetus to buy the U.S. currency.”
“I think it is just a matter of time that the dollar will test 115 yen after Mnuchin was silent about the dollar’s strength,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.
The euro was stable at $1.0593 <eur=>after shedding 0.6% the prior day.
The dollar index was firm at 101.52 after recovering overnight from a low of 100.84.
In Asian equities, Australian stocks increased 0.8% and Japan’s Nikkei (N225) gained more than 2% on a weaker yen to hit an 11-month high. Tokyo’s mining sub-sector jumped increased almost 10% and it was the biggest gainer involved.
MSCI’s broadest index of Asia-Pacific shares outside Japan increased 0.4%. Shanghai gained 0.7%.
Japan Petroleum Exploration Co increase 13%, posting its biggest intraday gain since March 2013. Hong Kong shares in China’s oil giants Sinopec, PetroChina and CNOOC gained as much as 4.8%, 6.1% and 8%, respectively.
The region’s stocks did not draw much incentive from Wall Street, where shares finished mostly lower on Wednesday as declines in utilities and technology offset energy flow.
Spot gold hit <xau=> a 10-month low of $1,163.45 on the dollar’s oil-induced increase.
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