Stan Choe
Oil shot to its highest price since 2023 after surging again Friday because of the Iran war, and a weak update on the US job market knocked stocks lower to cap Wall Street’s worst week since October.
The S&P 500 dropped 1.3 per cent after a report showed US employers cut more jobs last month than they created and after oil prices spiked above $US90 per barrel before trading closed on Saturday (Australian time). It will resume trading on Monday.
The Dow Jones plunged as many as 945 points before finishing with a loss of 453, or 0.9 per cent, and the Nasdaq composite sank 1.6 per cent. The Australian sharemarket is set to suffer heavy falls, with futures on Saturday pointing to a loss of 156 points, or 1.8 per cent, at the open.
The combination of a weak economy and high inflation is a worst-case scenario for US investors because the Federal Reserve has no good tool to fix both problems at the same time.
“You can’t sugarcoat this report,” according to Brian Jacobsen, chief economic strategist at Annex Wealth Management. “A negative payrolls number combined with a big jump in oil prices will have traders worrying about stagflation risks.”
Stagflation is what economists call the miserable mix of a stagnating economy with high inflation, and a separate report released Friday added to the sourness after showing that US retailers made less money in January than economists expected. It raised the disconcerting possibility that spending by US households, the main engine of the economy, may be stretched near its maximum.
Usually when the economy is unsteady and the job market is weakening, the Federal Reserve cuts interest rates to give things a boost. Lower rates can make it easier for households to get mortgages and for companies to raise money to expand, while also lifting prices for stocks and other investments. The Fed cut its main interest rate several times last year and had indicated more were to come this year.
But lower interest rates can also make inflation worse. And the Fed’s hands may be increasingly tied because spiking oil prices are pushing inflation higher due to disruptions for the energy industry.
The price for a barrel of Brent crude, the international standard, leaped another 8.5 per cent to settle at $US92.69. It briefly rose above $US94 to touch its highest level since September 2023.
A barrel of benchmark US crude breached the $US90 level for the first time since 2023 and jumped 12.2 per cent to $US90.90.
Oil prices have surged, with Brent up from near $US70 late last week, as the war has expanded and included areas critical to the production and movement of oil and gas in the Middle East. Much will depend on what happens with the Strait of Hormuz off Iran’s coast, where roughly a fifth of the world’s oil typically sails. On the weekend, the United Arab Emirates and Kuwait started reducing oil production.
Cutbacks by the two OPEC members follow a swathe of others in the region. Iraq started holding back production earlier this week as storage tanks started filling up, while Saudi Arabia shut its biggest refinery and Qatar closed the world’s largest liquefied natural gas export plant after drone attacks.
The US government gave details Friday about a plan President Donald Trump announced earlier to offer insurance to ships crossing the strait, but it had little effect on the market.
If oil prices spike further, like to $US100 per barrel, and stay there, some analysts and investors say it could be too much for the global economy to withstand.
To be sure, the US stock market has a history of bouncing back relatively quickly following conflicts in the Middle East and elsewhere, as long as oil prices don’t jump too high for too long. Uncertainty about just how high oil prices will go this time around and for how long caused frenetic swings across financial markets this past week, sometimes hour by hour.
On Monday, the S&P 500 tumbled to an immediate 1.2 per cent loss at the start of trading but made it all back and ended the day with a tiny gain.
Trump’s most recent signal on the war was that he wants an “unconditional surrender” of Iran, apparently ruling out negotiations.
In the bond market, Treasury yields wavered, with higher oil prices pushing upward on them and the discouraging updates on the US economy pulling downward.
The yield on the 10-year Treasury initially rose toward 4.19 per cent before pulling back to 4.14 per cent. That’s up from 4.13 per cent late Thursday and just 3.97 per cent a week earlier.
Smaller companies often feel the bite of high borrowing costs more because many need to borrow to grow. Smaller companies can also be more dependent on the strength of the US economy for their profits than big multinational rivals, and the smallest stocks on Wall Street took Friday’s sharpest dives.
The Russell 2000 index of small stocks fell a market-leading 2.3 per cent.
Among the big companies in the S&P 500, companies with high fuel bills helped lead the way lower. Old Dominion Freight Line sank 7.9 per cent, cruise line Carnival fell 5 per cent and Southwest Airlines lost 5.3 per cent.
All told, the S&P 500 fell 90.69 points to 6,740.02. The Dow Jones Industrial Average dropped 453.19 to 47,501.55, and the Nasdaq composite sank 361.31 to 22,387.68.
In stock markets abroad, indexes slumped in Europe following a better finish in Asia. London’s FTSE 100 fell 1.2 per cent, while Hong Kong’s Hang Seng jumped 1.7 per cent.
South Korea’s Kospi was nearly unchanged after plunging 12.1 per cent Wednesday for its worst loss in history and then rebounding 9.6 per cent Thursday.
AP
The Market Recap newsletter is a wrap of the day’s trading. Get it each weekday afternoon.
