TOKYO (Reuters): Asian stocks were mostly lower on Tuesday, with a sharp decline in crude oil prices weighing on energy shares, while the dollar dipped ahead of Federal Reserve Chairman Jerome Powell’s first US congressional testimony.
Spreadbetters expected European stocks to open slightly higher, with Britain’s FTSE, Germany’s DAX and France’s CAC each gaining about 0.1%.
Overnight on Wall Street, the Dow edged up 0.2% but the S&P 500 lost 0.1% as energy shares were hit by the drop in oil that offset a jump in financials.
MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.3% lower following two sessions of gains.
Chinese shares extended losses after dropping the previous day on soft economic data. The Shanghai Composite Index fell 1.1%, as did Hong Kong’s Hang Seng.
Australian stocks fell 0.5% and South Korea’s KOSPI was flat. Japan’s Nikkei rose 0.8%, supported by exporters’ gains.
“Crude has been rising steadily so some kind of adjustment was due. From this context the impact on the broader economy, inflation and therefore the stock markets should be limited,” said Soichiro Monji, senior economist at Daiwa SB Investments in Tokyo.
Crude prices slumped more than 4% on Monday, with Brent futures reaching a three-month low of $71.52 a barrel, as Libyan ports reopened and traders eyed potential supply increases by Russia and other producers.
Concerns over China’s second-quarter economic growth also weighed on oil prices. The country’s economy expanded at a slower pace as Beijing’s efforts to contain debt hurt activity, while June factory output growth weakened to a two-year low.
But Brent has gained about 7.5% in 2018, during which it poked above $80 a barrel in May to a 3-1/2-year high, as supply has been kept in check while a relatively strong global economy has supported demand.
“The stock markets have been quite steady recently, and this shows that investors are starting to look beyond the US midterm elections, which by then President (Donald) Trump’s posturing is expected to have peaked out,” said Monji of Daiwa SB Investments.
In currencies, the dollar index inched down 0.05% against a basket of six major currencies to 94.474 .
The index shed 0.25% on Monday, nudging away from a two-week high of 95.241 scaled on Friday ahead of Fed Chairman Powell’s testimony.
Powell will testify on the economy and monetary policy before the US Senate Banking Committee on Tuesday, followed by an appearance on Wednesday at the House of Representatives Financial Services Committee.
He is likely to reiterate the Fed’s stance towards gradual monetary policy tightening, and market focus will be on his views on recent trade tensions.
“In short, we expect the chairman to signal optimism on growth and inflation, consistent with continued ‘gradual’ tightening,” wrote Jim O’Sullivan, chief economist at High Frequency Economics.
“He will undoubtedly acknowledge some downside risks associated with the administration’s trade warmongering, but he will likely try to avoid sounding critical of the administration.” The euro rose 0.05% to $1.1719 after adding 0.25% overnight.
The dollar pared the previous day’s losses and gained 0.1% to 112.39 yen, crawling back towards a six-month peak of 112.80 touched last week.
The Australian dollar dipped 0.2% to $0.7405 .
Treasury yields remained buoyant after rising overnight when strong US domestic retail sales supported the view of solid economic growth in the second quarter.
The two-year Treasury yield was at 2.602% and in reach of a decade-high of 2.611% scaled on Monday.
Brent crude was last up 0.5% at $72.20 and US crude futures stood little changed at $68.07 a barrel after sliding more than 4% on Monday.
Copper on the London Metal Exchange was up 1.1% at $6,255 a ton amid low stockpiles. The industrial metal had sunk to a one-year low of $6,081 last week when trade war fears buffeted the broader markets.
Goldman Sachs expects volatile oil market, prices between $70 and $80 per barrel
Reuters: Investment bank Goldman Sachs expects volatile oil prices in the short-term on the back of uncertainty over possible disruptions to supply, with benchmark Brent crude in a $70-80 per barrel range.
Oil prices have declined sharply the past week as the Sino-US trade war intensifies and were hovering below $72 per barrel on Tuesday, not far from their lowest since mid-April.
“Production disruptions and large supply shifts driven by US political decisions are the drivers of this new fundamental volatility, with demand remaining robust so far,” the bank said in a note dated Monday.
The administration of US President Donald Trump is pushing countries to cut all imports of Iranian oil from November as it reimposes sanctions over Tehran’s nuclear programme. But US Treasury Secretary Steven Mnuchin said on Monday that in certain cases, there could be waivers for countries that need more time to wind down imports of oil from Iran.
“The uncertainty on the magnitude and timing of the supply shifts has muddied the near-term outlook for oil fundamentals,” Goldman said, adding that it continued to expect high supply volatility with potential for further disruptions.
“These supply shifts, alongside the ongoing surge in Saudi production, create the risk that the oil market moves into surplus in third-quarter 2018,” the bank said.
However, prices are expected to get some support longer term as global oil inventories are weak, according to the bank.
“Ultimately, global inventories are low, oil demand remains robust and we still expect a deficit once US secondary sanctions are reintroduced.”
Goldman said it still expects Brent to retest $80 per barrel, although this may occur only late this year depending on US oil policies, rather than this summer as it previously expected.
The bank added that the recent escalation in trade tensions was unlikely to have much impact on its 2018 oil demand growth view, but would likely create downside risks to its 2019 oil demand growth forecast of 1.6 million barrels per day.