Oil rout rattles nervous investors as Fed hike looms

London: Volatility swept through world markets on Monday as a renewed slide in oil and weakness in credit markets hit stocks, weighed on bond yields and added to the nervousness already building ahead of an expected US interest rate hike later this week.

European stocks wiped out earlier gains to trade in the red by midsession, while US futures turned flat. Brent crude tumbled 3.4 per cent to trade as low as $36.62 a barrel, its lowest since December 2008. A fall below $36.20 will take oil prices down to levels not seen since 2004.

Jitters in high-yield bond markets, which are among the most vulnerable to higher US rates, also rattled investors. Lucidus Capital Partners has liquidated its entire portfolio and plans to return the $900 million it has under management to investors next month, according to a media report.

Earlier, Asian stocks and emerging markets had come under pressure after the People’s Bank of China continued to guide its currency lower, setting the yuan/dollar official midpoint at its weakest since July 2011.

“It’s a perfect storm — the high yield sector and the fact that oil prices are unable to find a bottom — and has left investors floundering for any good news,” said Brenda Kelly, head analyst at London Capital Group.

US stock futures pointed to a flat open on Wall Street

On Friday, the Dow sank 1.8 per cent and the S&P 500 lost 1.9 per cent. Both indices are in the red year-to-date, on track for their first annual decline since 2008.

Yuan love

Talk of so-called “currency wars” picked up again after China’s decision to loosen its grip on the yuan and allow slow but steady depreciation in recent weeks added to concerns that the economy may be more fragile than expected.

China late on Friday launched a new trade-weighted yuan exchange rate index. Beijing said it was intended to discourage investors from exclusively tracking the yuan’s fluctuations against the greenback.

Data on Saturday painted a slightly brighter economic picture, however. Factory output growth accelerated to a five-month high, while retail sales rose at an annual 11.2 per cent pace, the strongest this year.

Spot yuan fell to as low as 6.4665 to the dollar, its lowest since mid-2011, taking its losses far this year to about 4 per cent. Volatile Shanghai stocks ended Monday 2.5 per cent higher, the biggest rise since November 4.

Elsewhere in currencies, the US dollar stumbled against major currencies, giving back earlier gains to resume last week’s weakness. The euro was flat on the day at $1.0990 and the dollar was down against the yen at 120.70 yen.

The greenback’s slip was in tandem with the reversal in US Treasury bond yields. The 10-year yield was last at 2.13 per cent, having traded at 2.17 per cent earlier in the day.

A Fed rate hike on Wednesday is a near certainty in the eyes of investors, and is seen as a first step towards normalising monetary conditions after an extended period of loose policy since the global financial crisis.

But against a backdrop of crumbling oil prices, emerging market and stress in the high-yield bond market, its timing could not be worse, some analysts say.

“Nerves are fraying ahead of the Fed’s expected decision to lift US rates on Wednesday. And this might just be a foretaste of what’s to come if the market does not like what the Fed has to say on Wednesday,” said Steve Barrow, head of G10 strategy at Standard Bank in London.

The standout in emerging markets on Monday was the South African rand, which chalked up its best day since the global crisis after Pravin Gordhan was re-appointed finance minister.

The rand was last up 4 per cent, clawing back some of the losses in recent months in part due to investor concerns over the country’s political turmoil, particularly the instability surrounding the position of finance minister.