Global equity markets slipped further on Thursday as Hurricane Rita bore down on the Texas coast.
As at least a million people fled the coast, investors were unnerved by the prospect that disruptions to refineries in Houston could lead to another spike in energy prices and slow down the economy. A sign these fears were shared internationally came when yields on the benchmark 10-year Bund briefly fell to a record low of 2.999 per cent.
Barclays Capital said “an absolutely monstrous-looking hurricane” was threatening key energy infrastructure. Crude prices rose through the $67 a barrel mark but the West Texas Intermediate closed down 30 cents to $66.50 a barrel as Rita was downgraded, while gasoline futures jumped 8.89 cents to $2.1405 a gallon.
“There are two concentrations of refining capacity in the US – one around New Orleans and the other around Houston. Now we could see one knocked over after the other,” said Roger Diwan, analyst with research consultancy PFC Energy.
US officials estimate about 23 per cent of US refining capacity has been shut down due to the two hurricanes.
Axel Busch, analyst at Energy Intelligence, said that if damage to oil installations was limited, the price downturn for crude could be “quite vicious”. He said there was “certainly no current shortage of crude oil”.
By the close, the Dow Jones Industrial Average had put on 0.5 per cent to 10,424.30, while the S&P 500 index was 0.3 per cent better at 1,206.21. The Nasdaq Composite index advanced 0.2 per cent at 2,111.14. In Europe, there was weakness, with the FTSE Eurofirst 300 index falling 0.3 per cent or 3.79 points to 1,201.6.
Analysts said losses might have been greater but for speculation that, if the impact of Rita was severe, the US Federal Reserve might pause raising interest rates. The thought was that one hurricane might not have been enough to achieve that, but two might. Ed Yardeni, the usually bullish chief investment strategist at Oak Associates, warned that a bout of stagflation – sluggish economic growth coupled with a high rate of inflation – was increasingly likely.
“I am not sure that the economy is resilient enough to withstand the one-two punches from the Katrina/Rita tag team,” he said. “Over the next six months, the economy is likely to be weak with fourth quarter 2005 and first quarter 2006 real GDP growth around 2 per cent, rather than 3 to 4 per cent, as I previously expected.”
Mr Yardeni said auto sales were likely to be especially depressed after an incentive-induced surge in June and July. The holiday shopping season was also likely to be one of the weakest in years, with no real blockbuster hits and lots of early discounts.
“Yet core inflation could finally show some passing through of higher energy costs as companies use the Katrina/Rita excuse to jack up their prices. Until recently, companies have offset energy costs with great productivity gains. But this will be hard to do if the economy is slowing.”
The benchmark 10-year Bund fell below the key psychological level of 3 per cent for the first time amid pessimism about the outlook for economic growth in the eurozone.
Later, however, Bund yields rose on news that Rita was weakening and in afternoon trading in London, they were 2.1 basis points up at 3.03 per cent. By late trade in New York, 10-year Treasury notes yielded 4.185 per cent, up 1.7 basis points. On Wednesday, 10-year yields hit a one-month high of 4.29 per cent.
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