Oil hits five-month high as markets weigh inflation risks

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Ricardo Goncalves (0:36)

Coming up, oil hits a five-month high. The implications next.

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You're listening to SBS On The Money with Ricardo Goncalves.

Ricardo Goncalves (0:48)

Hi, everyone. It is Friday, the 23rd of October, and this weekend, a milestone for Sydney with the opening of the city's second international airport. We'll take a closer look at the economics of Western Sydney International soon.

But first, to the Australian share market now, which finished flat. But it means for the week, the ASX200 ended 0.1% lower. The market did well to avoid the 2.9% thumping of the Nasdaq overnight, while the copper price hit a five-week low. BHP down 3.6%, Zip the biggest loser, tumbling 29, as Profit took a hit from a fraud incident in the US. In focus, though, was the oil price, which hit a five-month high of around 114 US. And for more, I spoke with Marjabeen Zamane, the head of FX Strategy at ANZ.

Marjabeen, so the ASX is down again today. How would you describe investor sentiment and why?

Marjabeen Zamane (1:43)

Yeah, look, I think it's all on the back of what happened overseas the night before, and we saw risk sentiment fall off because we had seen steep declines in US yields, equities came off as well, the US dollar came off as well. And I think it's a mix of several things. You've got concerns around fiscal deterioration in France, you've got obviously the ongoing conflict in the Middle East. And also there's a little bit of a risk of that potential AI unwind lingering in the background. Now, I think market participants may be looking to pare back a little bit of risk, just considering the fact that the next two weeks are going to be pretty busy. We have a series of central bank meetings that are coming up, and also we've got the US midterm elections, which are being focused then as well.

Ricardo Goncalves (2:28)

We heard from the Australian Treasurer today, Jim Chalmers, and he said the first thing he reads each morning is the overnight markets data, including bond yields and borrowing costs, which he gets delivered to him at around 5am.

Is that the first thing you look at too? And why do these numbers matter so much right now?

Marjabeen Zamane (2:47)

Yeah, I guess this is one of the things we look at, what changed overnight and why, because bond markets are often the fastest market to price in new information. So if US yields have moved a fair bit, it's telling me something important about how markets are thinking about inflation, growth, rates, fiscal risks.

Right now, yields matter a lot because we're in an environment where markets are constantly reassessing the balance between inflation, growth, fiscal policy, and also we've got almost every center bank hiking these days. So lots to think about there.

From an FX perspective, specifically, yields are critical because currencies are fundamentally a relative price story. So when US yields move relative to let's say Australia, it means something for FX too.

Ricardo Goncalves (3:32)

Okay. I want to talk about FX in a few moments. But first of all, oil is at a five-month high, that's keeping inflation elevated. Despite that, gold is at a two-month low.

So what's that telling you about the economic and investment environment right now? And how much does that have to do with the potential, as you mentioned earlier, for global central banks to continue lifting interest rates?

Marjabeen Zamane (3:54)

Yeah, look, gold is a safe-haven asset. And so traditionally, it should be doing well in times of risk sentiment turning south. However, we are in an environment where interest rates globally are moving higher, and gold doesn't pay us any income.

So I think that's more yield-chasing behavior that's probably seeing gold come off a fair bit. But again, over the longer term, we remain positive gold, because it is a safe haven asset, and we have continued to see different demand drivers for it, whether it's investment demand, whether it's reserve managers picking up gold over the past couple of years, and that will continue to support gold prices.

Ricardo Goncalves (4:35)

And let's end on currencies. How is all of everything we've just discussed impacting currency markets, and the role the Australian dollar is playing right now?