TOKYO – Oil prices, and energy shares swept higher on Thursday after OPEC agreed to cut crude output to clear a glut, while the dollar and bond yields rose sharply on prospects that resulting inflationary pressures will lead to higher interest rates.
The Organization of the Petroleum Exporting Countries on Wednesday agreed to its first output cut since 2008, finally taking action having seen global oil prices fall by more than half in the last two years.
Non-OPEC Russia will also join output reductions for the first time in 15 years.
U.S. crude oil soared more than 9 percent overnight to a one-month high just shy of $50.00 a barrel. The contracts were a fraction lower at $49.42 a barrel early on Thursday. Brent crude was just below $52.00 a barrel after rallying to a six-week peak of $52.37.
The jump in oil prices added to inflation expectations in the United States, which were already high on prospects that president-elect Donald Trump would adopt reflationary policies using a large fiscal stimulus.
As a result U.S. Treasuries resumed their rout, with prices sliding and yields spiking, to send the dollar rallying against its peers. The yield on 30-year bonds, which are most sensitive to inflation eroding their value, climbed about 9 basis points to 2.39 percent overnight, taking it back towards 14-month peaks marked last week.
“The reflation trade continues to work in earnest, this time Trump has taken a back seat and OPEC and Russia have taken the initiative and lit the fuse under the oil price,” wrote Chris Weston, chief market strategist at IG in Melbourne.
“The consensus was that we would get some sort of loose agreement from the collective that kept oil supported, but left the market asking many more questions. What we have seen however has been real meat on the bone.”
If the bounce in oil prices gathers pace after the OPEC deal it was expected to have a broad implication on the global economy.
Brent is off the 12-year low of $27 per barrel marked in January but still less than half of where they were in 2014.
Economists expect a further recovery in crude to bode well for oil-exporting economies, while potentially easing deflationary pressures in developed economies locked in a battle against falling prices.
OPEC’s output cut is also seen as a boon for U.S. shale producers, rivals to the oil cartel. The S&P energy index jumped nearly 5 percent on Wednesday.
The dollar touched a 9-1/2-month high of 114.830 yen, adding to gains made overnight when it surged 1.8 percent.
Steven Mnuchin, President-elect Donald Trump’s pick to lead the U.S. Treasury, gave no hint of any unease at the strong dollar in his first remarks since being named for the job, giving traders fresh impetus to buy the U.S. currency.
“I think it is just a matter of time that the dollar will test 115 yen after Mnuchin was silent about the dollar’s strength,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.
The euro was steady at $1.0593 after shedding 0.6 percent the previous day.
The dollar index was firm at 101.52 after rallying overnight from a low of 100.84.
In Asian equities, Australian stocks were up 0.8 percent and Japan’s Nikkei gained more than 2 percent on a weaker yen to hit an 11-month peak. Tokyo’s mining sub-sector jumped nearly 10 percent and was the biggest gainer on board.
MSCI’s broadest index of Asia-Pacific shares outside Japan was up 0.4 percent. Shanghai gained 0.7 percent.
Japan Petroleum Exploration Co rose 13 percent, posting its biggest intraday gain since March 2013. Hong Kong shares in China’s oil giants Sinopec, PetroChina and CNOOC gained as much as 4.8 percent, 6.1 percent and 8 percent, respectively.
The region’s stocks did not draw much incentive from Wall Street, where shares ended mostly lower on Wednesday as drops in utilities and technology offset energy’s surge.
Spot gold touched a 10-month low of $1,163.45 on the dollar’s oil-induced surge.
(Reporting by Shinichi Saoshiro; Additional reporting by Hideyuki Sano in Tokyo; Editing by Simon Cameron-Moore)