The price of Brent crude rose above the $100 per barrel mark on Friday morning. This occurred against the backdrop of escalating conflict in the Middle East, which heightened concerns about potential supply disruptions and added new inflation risks. These events took place just one day after the South African Reserve Bank (SARB) decided to keep interest rates unchanged.
Brent crude reached $100.81 per barrel at 5:30 AM South African time on Friday. This increase followed a 7% rise in the previous trading session, when the price stabilized at $100.69 per barrel. The sharp jump was caused by intensified Houthi attacks on Saudi oil tankers, raising concerns about global energy supplies.
The return of oil prices to the three-digit level exerted significant pressure on investor sentiment in global markets. According to the Morning Comment report from Anchor Capital, the 7.0% rise in Brent to $100.69 per barrel was linked to Houthi attacks on Saudi tankers, intensifying global supply issues. This new surge in energy prices came during a sensitive period for South Africa, as the Monetary Policy Committee (MPC) decided on Thursday to leave the repo rate unchanged at 7%.
Despite the decision to maintain rates, rising oil prices are expected to remain a key inflation risk factor in the coming months, as higher fuel costs permeate the broader economy.
South African markets closed negative on Thursday as investors reacted to both international events and domestic monetary policy. The JSE All Share index fell by 1.2%, closing at 108,335 points. Among the biggest losers were mining stocks: Northam Platinum dropped by 5.2%, Valterra Platinum lost 4.5%, and gold producers, including DRDGold, Sibanye Stillwater, AngloGold Ashanti, and Harmony Gold Mining, recorded notable losses.
Retail companies also felt the pressure: Woolworths Holdings declined by 3.9%, Foschini Group lost 3.3%, and Shoprite Holdings decreased by 2.3%. Following the Reserve Bank's announcement, the local currency weakened against the US dollar, alongside renewed flight to safe-haven assets. By the start of Friday, the local currency traded at a rate of R16.8307 to the dollar, R19.1524 to the euro, and R22.4058 to the British pound.
Bond markets also reflected growing investor caution: the yield on South Africa's benchmark 10-year government bond rose to 8.98%, and the 20-year bond yield climbed to 9.50%.
Inflationary concerns related to oil spread to international markets. The UK's FTSE 100 index fell by 0.7% as investors feared that higher energy prices could keep inflation elevated and delay interest rate cuts. Declines were also seen in the US markets: the S&P 500 fell by 1.2%, the Dow Jones Industrial Average lost 1%, and the tech-focused Nasdaq dropped by 2.2%, as investors weighed concerns over AI spending against rising geopolitical risks.
Asian markets continued their negative trend on Friday morning, following overnight losses on Wall Street. Japan's Nikkei 225 fell by 2.8%, Hong Kong's Hang Seng dropped by 1.3%, and South Korea's Kospi plummeted by 5.9%.
Meanwhile, gold declined despite ongoing geopolitical uncertainty. The precious metal traded at $4,031.46 per ounce after falling 2% on Thursday, as expectations of interest rate hikes continued to pressure bullion prices.
As oil trades above $100 per barrel again, markets are expected to remain highly sensitive to developments in the Middle East. Investors are also closely watching whether persistently high energy prices will begin to influence global inflation expectations and shape future central bank monetary policy decisions, including those of the South African Reserve Bank.
The international oil benchmark Brent saw a significant surge, climbing by as much as five percent to exceed $98 a barrel on Thursday. This rise followed reports that Houthi rebels, who are backed by Tehran, had successfully attacked two Saudi oil tankers in the Red Sea, fueling anxieties that the conflict in the Middle East is expanding.
In response to the escalating tensions, Iran declared its intention to continue striking the region as long as US military actions persisted. Susannah Streeter, chief investment strategist at Wealth Club, noted that investors adopted a cautious stance due to growing apprehension regarding the ongoing energy shortage. She warned that increased pressure on both the Strait of Hormuz and the Red Sea suggests markets are preparing for potential disruptions to vital energy transit routes, which could sustain high oil prices.
Analysts pointed out that the outlook for higher oil costs also implies a greater likelihood of rising inflation and subsequent increases in interest rates, contributing to a generally subdued market sentiment.
European exchanges showed weakness during midday trading, with indices in London, Paris, and Frankfurt all declining. Specifically, London's FTSE 100 index was pulled lower by a nine percent decline in Centrica shares, following the announcement that the owner of British Gas planned to reduce 1,300 positions alongside an earnings review. Meanwhile, Paris experienced a one percent dip, pressured by a fifteen percent fall in semiconductor firm STMicroelectronics because its sales projections missed expectations.
Conversely, French energy major TotalEnergies gained three percent after disclosing that its net profit had doubled in the second quarter, benefiting from the upward trend in energy prices driven by the war.
Asian traders began purchasing undervalued technology stocks. Seoul rose by over four percent, supported by gains in chip manufacturers SK hynix and Samsung, while Tokyo saw boosts from Advantest and SoftBank. Hong Kong and Shanghai also registered increases.
Investor interest in Artificial Intelligence (AI) has faced scrutiny recently, stemming from concerns over inflated valuations and uncertainty regarding when the massive investments in the sector will yield returns. A recent earnings report from Alphabet, the parent company of Google, heightened these worries by stating that it anticipates spending up to $205 billion on AI this year, significantly surpassing prior estimates.
Attention is focused on Tokyo as the Japanese yen reached a new four-decade low against the dollar. This depreciation occurs amidst concerns about the disparity between the low interest rates maintained by the Bank of Japan and those set by the United States and other major economies. The combination of rising oil prices and worries about the Japanese economy has further exerted downward pressure on the local currency.
Brent crude oil prices exceeded $90 a barrel on Tuesday following the resumption of tensions between the United States and Iran, which heightened inflation risks. Economists warn that the South African Reserve Bank may decide on a further interest rate hike.
The renewed conflict between the US and Iran returned global markets to a risk-off mode on Tuesday. Brent crude reached $90.37 a barrel in the afternoon as investors assessed the potential impact of prolonged supply disruptions through the Strait of Hormuz.
The sharp rise in energy prices intensified inflation concerns both globally and in South Africa. This drew increased attention to the Monetary Policy Committee (MPC) meeting of the South African Reserve Bank (SARB) scheduled for Thursday, where economists are divided on another rate hike.
Patrick Buthelezi, an economist at Sanlam Investments, noted that the resumption of hostile actions added another layer of uncertainty to an already fragile global economy. He stated that the renewed tension calls into question the June memorandum of understanding between the US and Iran, emphasizing that the situation remains unstable despite open diplomatic channels.
According to Buthelezi, the conflict has already begun to disrupt commercial shipping routes and reversed the decline in oil prices observed after previous diplomatic efforts. Although oil prices have risen significantly, they remain below the peak levels reached during the height of the conflict. However, he added that a protracted conflict will ultimately affect reserves that have served as a buffer against supply disruptions.
Buthelezi also pointed out that higher energy costs and escalating trade tensions threaten to slow global economic growth, despite the continued resilience of AI-driven investments. He noted that global growth is supported by strong demand for artificial intelligence and its continuous adoption, but this year it will be tested not only by higher energy prices but also by increased trade tariffs.
Although South Africa continues to benefit from economic reforms and relatively favorable trade conditions, Buthelezi forecasts a moderate pace of growth. He believes that progress in economic reforms and favorable trade conditions in South Africa partially offset the pressure caused by rising energy prices and US tariffs, but economic growth is likely to remain moderate.
He also suggested that central banks worldwide will remain cautious, monitoring inflation risks associated with rising oil prices. He believes that the US Federal Reserve will likely maintain a hawkish stance and may raise interest rates even further, as inflation has remained above the 2% target since 2021.
Locally, Buthelezi expects the Reserve Bank to continue tightening monetary policy. He posits that SARB is likely to raise interest rates again because inflation exceeds the target, and geopolitical events increase inflation risk. Recognizing that the MPC is likely to remain divided, he predicts a moderate and controlled cycle of rate hikes.
Despite some optimism related to ongoing mediation efforts, market sentiment remains cautious. Bianca Botess, Managing Director at Citadel Global, reported that investors are closely watching developments in both financial markets and geopolitics. She noted that the S&P 500 closed down 0.19%, while US futures showed gains on Tuesday morning.
Botess added that Asian markets reacted positively to the resumption of mediation efforts between the US and Iran. The MSCI Asia Pacific Index excluding Japan rose by 0.25% on Tuesday, as Asia felt relief from the mediation in the Middle East. She also mentioned that the South African rand continues to follow global investor sentiment, trading steadily at R16.44 against the US dollar, R18.81 against the euro, and R22.15 against the British pound.
Neil Wilson, Investment Strategist at Saxo UK, stated that energy markets remain highly sensitive to the expanding conflict. He noted that the Middle East conflict appears to have expanded and intensified over the weekend. Although oil prices briefly fell after mediation efforts, risks remain heavily skewed towards higher energy prices, inflation, and rates.
Wilson also emphasized that higher oil prices once again put pressure on the broader stock market, leading to a 0.2% drop in the S&P 500. Investors will be closely watching South African inflation data expected on Wednesday, as well as the Reserve Bank's announcement on Thursday, to determine whether slowing inflation or supporting the struggling economy is the priority.
