New York - Throw out the tea leaves and the crystal ball. When it comes to divining the future of the reflation trade, investors should be keeping a close eye on oil.
Crude’s bounce following the production deal by the Organisation of the Petroleum Exporting Countries (Opec) in November underpinned many assumptions the market has about economic growth and inflation, Daniel Morris, a senior investment strategist with BNP Paribas Investment Partners, says.
But after surging to an almost 18-month high in January, Brent oil has wiped out the gains made soon after the output-reduction pact as the group’s aim to stabilise the global market is undermined by higher US production.
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“Lingering doubt” that Opec’s cuts will be extended, along with rising US output, is bringing oil’s outlook into question, he said.
As a key cost for both consumers and industries, oil plays a pivotal role when it comes to global inflation expectations. That sentiment feeds into the outlook for bond yields and equities, Morris said.
Crude rallied along with shares and other commodities after Donald Trump’s election ignited bets on fiscal spending-fuelled growth. Since reaching a peak on January 6, however, Brent has retreated 10percent amid renewed anxiety over the prospects for global demand and supply.