Investors exit airlines and exporters

PUBLISHED : Wednesday, 29 September, 2004, 12:00am
UPDATED : Wednesday, 29 September, 2004, 12:00am

Jitters over oil prices spark sell-off as markets weigh their impact on growth

A rise in crude-oil futures to above US$50 per barrel yesterday put pressure on key stock markets around the region, including Hong Kong, as investors digested potential negative implications for growth and inflation.

Airlines and transport companies were sold off due to rising fuel costs, while exporters were discarded amid fears of reduced demand if global economic growth slows.

Only the bourses in China, Australia and New Zealand were able to shake the oil-price fears and finish higher. Taiwan and South Korea were closed for public holidays, while other markets fell by between 0.2 and 1.4 per cent.

Market watchers said oil's rise yesterday to a new high was well factored into share prices in the most vulnerable sectors. More important was the potential damage from oil prices staying at these levels into next year, they said.

'There is nothing significant about US$50 - it's purely psychological - but the rise in oil prices is having an incremental impact on growth because it is essentially a tax on consumption and also on government financing,' said Merrill Lynch's head of regional strategy Spencer White.

'The longer it's up here, the more of a drag it becomes and the more inflationary it is. You could end up with high input costs and slower growth - an unpleasant mix.'

The November contract of light sweet crude oil on the New York Mercantile Exchange rose to an intraday high of US$50.47 in electronic trading yesterday, up 1.67 per cent from $49.64 at the close of pit trading in New York. By the end of the Asian session, it had retreated slightly to about US$50.30.

Feverish markets cooled slightly after Saudi Arabia undertook to increase oil production capacity to 11 million barrels per day within weeks, according to AFP.

The front month futures contract has risen for nine days and is up 35.7 per cent in the quarter.

'The risk of high oil prices is certainly a lot higher this time as it is not just due to short-term reasons but to underlying demand factors,' said Rexcapital Asset Management executive director Alex Wong.

'We're beginning to see a negative impact of high oil prices on corporate earnings. The market reaction is still moderate because the prevailing view is that the oil price will come back down,' he said.

However, with the northern hemisphere's winter and its high demand for heating oil approaching, uncertainty about supplies and high prices was likely to remain, other analysts said.