By Tommy Stubbington
Shockwaves from collapsing oil prices continued to reverberate
through markets on Tuesday, sparking bouts of volatility across a
slew of assets classes and sending investors scrambling to position
as 2014 fades.
Although stocks and currencies closely linked to commodity
prices remained under fierce pressure all day--crushed by the price
of Brent crude slumping to a yet another five-and-a-half year low
of just $58.50 per barrel--the sell-off proved temporary elsewhere,
keeping investors on edge.
Having earlier in the session tumbled to new two-month lows,
extending Monday's sharp falls, the Stoxx Europe 600 ended the
session up 1.7%.
Since the start of the month, the index has depreciated more
than 5% and some traders said that some investors were now seeing
an attractive entry point. François Savary, who oversees about $10
billion of assets as chief investment officer at Swiss bank Reyl,
however, attributed the recovery to the prospect of cheaper oil
eventually providing a boost to growth and stock prices by putting
more money in consumers' pockets.
Even London's FTSE 100, vastly exposed to the oil and gas sector
through names like BP PLC and Royal Dutch Shell PLC, closed Tuesday
up 2.4%--its largest one-day point and percentage gain since July
2013--having earlier in the session hovered around its 2014
low.
"This underlines the fact markets still don't know whether to
charge or retreat, and suggests we can expect further volatility to
come," said Laith Khalaf, a senior analyst at broker Hargreaves
Lansdown.
In Russia on Tuesday, prospects for markets showed no signs of
brightening.
The ruble plummeted to a fresh all-time low of above 80 against
the U.S. dollar, dealing a hefty blow to the country's central bank
which late Monday jacked up its key interest rate by 6.5 percentage
points to 17% in a dramatic attempt to stem seemingly relentless
outflows.
In late European trade, the ruble recovered somewhat to around
67.75 against the greenback, but it nonetheless remains around 50%
lower on the year, additionally battered by Western sanctions.
"Russia is in the midst of a perfect storm," said Heinz
Rüttimann, emerging market strategist at Swiss private bank Julius
Baer. "Western sanctions hurt, the oil price is down, interest
rates high and the economy falling back into recession. It cannot
get much worse for Russia, " he added.
Jason Pidcock, a fund manager at Newton, which manages around
GBP50.9 billion ($80.1 billion) in assets, said that--barring a
very rapid rebound in the oil price--he doesn't think that there is
anything that will "stop Russia going into a very sharp and deep
recession".
The CBOE Volatility Index, commonly considered a fear gauge of
global markets, rose more than 8% on the day, briefly peaking above
23 before receding to just above 20. Less than two weeks ago it was
at trading below 12.
"We are not prone to adding risk at this time of year,
especially on illiquid markets [such as Russia]," said Didier
Lambert, an executive director at J.P. Morgan Asset Management
which looks after around $1.7 trillion in assets.
In light of the major swings in the ruble rate on Tuesday, he
says it's simply not tradeable. "It's a market you want to stay out
of."
The Turkish lira fell 1.5%, also to an all-time low against the
dollar, before retracing, while the Polish zloty and Hungarian
forint weakened too. The Norwegian krone, another currency closely
correlated with the price of oil, fell more than 5% against the
dollar before reversing those moves. Earlier in the session it also
hit parity with its Swedish counterpart.
Further afield, stocks in the Persian Gulf suffered, while the
German government bonds clocked yet another all-time high, fueled
by surging demand for safe-haven assets.
The yield on Germany's 10-year bond sank to 0.57%. Bond yields
fall as prices rise.
"Investors are scaling back risk exposure as year-end
approaches, and beginning to realize that the economic scenario
priced into historically low bond yields and collapsing commodity
prices is hardly consistent with the growth required for an
improvement in corporate profits," said Ian Williams, economist and
strategist at brokerage Peel Hunt.
A contraction of China's manufacturing sector added to the
gloom, while business activity in the eurozone picked up only
modestly in December, data showed.
Like European equity markets, however, stocks in the U.S.
brushed off any negative implications of weaker oil in late
European trade Tuesday--the S&P rose almost 1%.
Mr. Savary at Reyl also attributed that move to the potential
upside of cheaper commodities, but like many of his counterparts he
said that he was nonetheless holding back from adding to his stock
investments against the backdrop of financial turmoil in
Russia.
"The oil price is reinforcing the possibility of a default by
Russia," he said.
"That would have an impact on financial institutions and
economic activity in Europe, and it is making people nervous."
Christopher Whittall
contributed to this article.
Write to Tommy Stubbington at tommy.stubbington@wsj.com and
Josie Cox at josie.cox@wsj.com
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