Wall St ended closing higher over night due to bargain hunting investors trying to snap up stocks cheaply. Overnight world equity markets high a two and a half year low, driven by falling European markets as well as drops in oil prices with West Texas crude crashing below $US27 a barrel overnight for the first time since 2003. Oil prices have slid more than 25 per cent this year, and West Texas crude slumped 6.7 per cent to $US26.63 a barrel.
Locally, the ASX index reversed its earlier losses to add 0.3 per cent to 4,816. The ASX is coming off the back of a heavy fall yesterday and the futures benefitted from Wall Street’s late recovery from the worst of its losses. The Australian dollar closed higher to $US0.692 and spot gold added 0.6 per cent to $US1,101 an ounce as investors sought the safe-haven commodity.
Key factors driving market weakness
1.The fall in oil and commodity prices in general, which markets are interpreting somewhat as a signal that global demand has weakened;
2. Concerns about the growth outlook for China, where China’s growth is continuing to slow down and the world is getting nervous;
3. The Fed lifted interest rates in December and the market is absorbing the likely impact of higher interest rates on those emerging economies that have got a lot of exposure to US-denominated debt;
Two sides to falling oil price
“A fall in oil prices is a boost to supply; that is we’ve got more oil, pushing the oil price down and that means petrol prices fall, that boosts disposable incomes for households and boosts profits for those industries not exposed to the mining industry.
“But at the same time it is not good news for oil or commodity producers in general and what we’ve got is a whole range of emerging economies in recent times that have been a key driver of global growth, that have been very reliant on the commodity prices, so as the commodity prices are coming down, the industries are coming under more and more pressure and interest rates are rising which means it’s costing more to fund themselves and they have less revenue to do it.”
– HSBC economist Paul Bloxham spoke with ABC News Breakfast