Oil spikes on OPEC failure, Didi plunges on China control, and independence from Covid.
Surge
Oil hit a six-year high this morning after the breakdown in talks among OPEC and its allies left the market without the production hike it was expecting. A barrel of West Texas Intermediate for August delivery traded as high as $76.98 with no talks scheduled for today. The move higher in crude risks heightening inflation fears among investors. The U.S. is asking for a compromise solution to be found, with a White House official saying President Joe Biden wants Americans to have access to affordable and reliable energy as the economy reopens.
Didi down
Shares in Didi Global Inc. plunged in premarket trading, dropping as low as $10.90 after China’s cyberspace regulator ordered app stores to remove the company from their listings. While the ban does not stop Didi operating in its home market, the timing of the move will raise questions about whether the IPO should have gone ahead. Regulators had asked the company to delay the offering in recent months, according to people familiar with the matter. The events will do nothing to reassure U.S. investors about the risks involved in China IPOs. There are currently 34 pending filings for U.S. listings by firms based in China or Hong Kong. Didi’s collapse from its $14 listing last week makes their task much harder.
Relaxing
President Biden all but announced an end to the pandemic in the U.S. on Sunday, saying the country had achieved “ independence” from the coronavirus. The U.K. government is not far behind, with Prime Minister Boris Johnson planning to end almost all legal measures introduced to control the virus from July 19. The delta variant continues to prove difficult to control, however, with Russia reporting its highest-ever number of fatalities on Tuesday. The variant is also present in one of Africa’s worst outbreaks.
Markets slip
Oil price volatility aside, it is a relatively quiet morning for global equities so far. Overnight the MSCI Asia Pacific Index gained less than 0.1% while Japan’s Topix index closed 0.3% higher. In Europe the Stoxx 600 Index was broadly unchanged at 5:50 a.m. Eastern Time with travel companies the best performers. S&P 500 futures pointed to small drop at the open, the 10-year Treasury yield was at 1.422% and gold was back over $1,800 an ounce.
Coming up...
The final reading of U.S. services and composite PMI for June is at 9:45 a.m., with ISM services for the month at 10:00 a.m. Jeff Bezos, Mark Zuckerberg, Warren Buffett and Tim Cook are on the guest list for the annual Sun Valley conference which runs this week. Vulcan Materials Co. is among the few companies reporting results.
What we've been reading
Here's what caught our eye over the long weekend.
And finally, here’s what Joe’s interested in this morning
West Texas Oil hit its highest level in over six years this morning after the failure of OPEC+ to come up with an agreement to expand production.
Oil prices feed right into gasoline prices. And gasoline prices are highly salient in how people perceive inflation. And perceptions of inflation are thought by many economists to drive actual inflation. So the OPEC+ failure to expand supply implicitly becomes a Federal Reserve story.
You might think there isn't much for the Fed to do here. It can't make more production happen on its own. It can't print oil.
But there is one thing it can, theoretically do, which is induce a recession. If the Fed hiked rates dramatically enough, it could probably throttle economic growth, reduce the need to commute by reducing job creation. It could take money out of people's hands, causing them to fly and drive less for travel. This would probably have spillover effects throughout the world if the Fed went hard enough, easing oil prices by weakening the economy globally.
Of course, there are still millions of people out of work relative to before the crisis.
Such a policy would be devastating to millions existing workers and job seekers. Still the Fed could probably do it.
So if you're looking at oil and you're thinking about inflation, and how the Fed might tackle it, this is implicitly the strategy it would have to pursue. Just something to think about it. For monetary policy to be effective in tamping down oil prices here, it would have to be strong enough to throw people out of work.
Joe Weisenthal is an editor at Bloomberg
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