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The price of oil has hit a fresh record high of more than $86 a barrel.
This isn’t an all-time record – at least, not if you adjust for inflation. But it’s not far off it. The price of oil in real terms hit around $90 a barrel in 1980, after the Iranian revolution.
Oil is far from the only commodity taking off right now. Our favourite ‘safe haven’, gold, is at fresh 28-year highs, well above $750 an ounce, while platinum also hit a fresh record.
Anyone who thought that inflation was yesterday‘s problem needs to think again…
The price of oil is rising for many reasons – the current excuse for itchy trading fingers is the fear that Turkey is set to invade northern Iraq. There’s also the fears that we’re short of fuel as we head for winter. But broadly speaking, the underlying reason for rising oil prices is that the world is running low on oil, and at the same time, is positively over-stuffed with dollars.
Although the price of crude may have risen sharply, the weak dollar has meant that consumers in the UK have been shielded to an extent from a corresponding rise in fuel prices. Even so, petrol isn’t cheap, as anyone who’s paying near enough £1 a litre to fill their car will be very aware, and it‘s only going to get dearer.
The raw materials that feed into energy prices and food prices are leaping up across the board. As has been happening for years now, the prices of the things that we need – like food and fuel – are under constant inflationary pressure. But up until now, the price of the things that we want – like consumer goods and trendy new clothes – have been falling or flat to compensate.
However, this may not be the case for much longer. While the US is facing a recession, and hopes to keep interest rates low, the rest of the world is continuing to grow, and inflation is becoming more and more of a problem in various emerging market economies.
In China, inflation is rising at 6.5% a year, while in Vietnam, the figure is 9%. In Singapore meanwhile, August consumer prices hit a 12-year high, says Bloomberg, while India’s inflation rate is at its highest since 2005.
The rise of inflation is helping these countries to feel a lot more relaxed about allowing their currencies to climb against the dollar, as an alternative to rising interest rates. This has also been helped by the fact that many are now concentrating on finding alternative uses for their vast currency reserves, through the huge sovereign wealth funds which have so many in the West increasingly fearful for the future of strategic companies.
The knowledge that they have an investment strategy may make these countries less concerned about the declining value of their dollar holdings which up until recently have essentially just been sitting there earning a pitiful return.
It’s bad news for the US, of course. Already, analysts are forecasting that the number of Treasuries issued next year will have to rise for the first time since 2004. If America has to issue more IOUs, it will also have to pay more interest on them to attract buyers – after all, who wants to give another pile of money to the biggest debtor on the planet without being adequately compensated for the risk?
And unfortunately, it’s also bad news for us. If the currencies get stronger in the ‘workhouse of the world’ (as Asia has been dubbed), then their exports will become more expensive too. And that means that the things we want will start to become just as costly as the things we need.
All of this is happening at a time when most people are hoping that the next UK interest rate move will be downwards, and at a time when the UK consumer can’t even afford to pay for what they have, let alone what they might need or want in the future.
But with inflation just waiting for a chance to erupt, they may be waiting for a very long time.
Turning to the wider markets…
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In London, the FTSE 100 dived 86 points lower to end yesterday at 6,644. Worries about the impact of recent credit market turmoil on US corporate earnings weighed on investor sentiment, as did fresh falls for Northern Rock. The mortgage bank tumbled 20% on worries that proposed takeover deals would offer little benefit to shareholders. For a full market report, see: London market close.
On the Continent, the Paris CAC-40 was 36 points lower, at 5,807. Over in Frankfurt, Siemens led blue-chip stocks lower as profits failed to live up to market expectations. The benchmark DAX-30 index ended the day down 71 points, at 7,969.
Across the Atlantic, the soaring oil price combined with a warning from the country’s largest bank, Citigroup, that the credit crunch would hit its Q4 profits hammered US stocks. The Dow Jones fell 108 points to end the session at 13,984, although oil major Exxon Mobil managed a share price rise of 1.4%. The tech-rich Nasdaq was 25 points lower, at 2,780. And the S&P 500 was down 13 points, at 1,548.
In Asia, stocks followed Wall Street’s slide today. The Japanese Nikkei was down 220 points to close at 17,137, whilst the Hang Seng was down 586 points at 28,954.
Crude oil closed at a record high of $86.13 in New York last night, and continued to rise – to as high as $86.73 – today. In London, Brent spot was up to $83.75.
Spot gold hit a new 28-year high yesterday of $762.60 yesterday on safe-haven buying and was last quoted at $762.00. Silver, meanwhile, was was upto 13.85 from $13.77 late in New York.
In the forex markets, the pound was at 2.0365 against the dollar and 1.4369 against the euro. And the dollar was at 0.7053 against the euro and 116.88 against the Japanese yen.
And in London this morning, leisure group Whitebread announced a tripling of first-half profit thanks to the sale of its David Lloyd health club chain. Net income was up to £499.7m compared to £136m over the same period in 2006. The company, which owns Premier Travel Inn and Costa Coffee, announced that sales at its hotels and cafes were ‘in line’ with expectations. Whitebread shares were down 0.8% in early trade.
And our recommended articles for today…
How the City fell in love with commodities
– Investors spooked by subprime are suddenly piling into commodities markets and that means a mind-boggling array of new investment products too. Adrian Ash looks at what’s causing the natural resources rush – and why the trend could spell havoc for your household budget – here: How the City fell in love with commodities.
Why I’m still invested in Japan
– The Japanese market may have been ‘worse than useless’ over the past year and a half, says Merryn Somerset Webb. But as a safe haven from subprime fallout, it is a far better bet than its emerging Asia neighbours. To find out why Japan could truly be the most defensive place to be, read: Why I’m still invested in Japan