HONG KONG: Oil prices extended gains after a sharp sell-off on Wall Street over the Federal Reserve’s plan to raise interest rates to fight soaring inflation.
Rising prices since the start of 2021 have forced central banks around the world to start scaling back the huge financial support they provided at the start of the pandemic, with many warning that failure to act could cause them to spiral out of control.
Treasurers in several countries have started the wheel, but the main focus has been on the Federal Reserve – the central bank of the world’s largest economy – which has so far held off on raising rates until now.
Officials are now reining in their massive bond-buying program and plan to raise borrowing costs in March.
But while Fed Chairman Jerome Powell has said the policy committee will tread carefully and be careful not to jeopardize the economic recovery, there are concerns that it will have to be more aggressive than initially thought to lift inflation from a four-year high fall back.
Some commentators were expecting a 50 basis point gain in March, down from an initial estimate of 25.
Expectations of rapidly rising costs have sent U.S. Treasury yields soaring and led to a near panic in the stock market, with all three major Wall Street indexes in the red so far this year and set multiple records in 2021.
Much of Asia continued to fall on Wednesday.
Tokyo shed 1.8 percent, compounded by steep falls in market heavyweights Sony and Toyota. Sony was hurt by news that rival Microsoft would pay $69 billion for US gaming giant Activision Blizzard, betting big on the prospects of the video game market. Toyota’s sell-off came after warning it expects to miss its production target for this fiscal year.
Sydney, Seoul, Singapore, Wellington, Taipei, Manila and Jakarta were also in retreat.
“Generally, we do expect to see that the bond market is going to drive volatility, more broadly based, across the equity markets and other markets as well,” Winnie Cisar, at CreditSights, told Bloomberg Television.
However, Hong Kong and Shanghai rose, supported by remarks from the Chinese central bank hinting it would unveil fresh economy-supporting measures, having cut interest rates on Monday for the first time since the start of the pandemic.
While markets are suffering from wild swings, it is still widely believed that the global recovery is still on track as economies reopen and fears of a less severe variant of Omicron Covid recede.
A major sign on this front was oil, which rose again on Wednesday after both contracts hit more than seven-year highs on the back of demand optimism.
The surge was given extra impetus by news of an explosion at a key pipeline running from Iraq to Turkey, which removed a key source of supply that transports more than 450,000 barrels a day, according to Bloomberg News.
That came a day after Yemen’s Huthi rebels in Abu Dhabi claimed an attack that triggered a fuel tank blast killing three people and warned civilians and foreign firms in the oil-rich United Arab Emirates to avoid “vital installations”.
“It’s a perfect storm,” Vandana Hari, of Vanda Insights, said.
“A bunch of supply disruptions, lingering OPEC+ production shortfalls and heightened geopolitical tensions. Plus there’s low inventory levels combining with robust demand.”