The Hindu Business Line : Global markets edgy on soaring oil prices, rising interest rates

THERE is edgy nervousness in the investment market as the oil price is now approaching $70 per barrel mark and the Federal Reserve in the US and European Central Bank, are working on a strategy of raising interest rates.

Rising oil prices in the US is leading to record high trade gap ($58.82 billion in June) and by end of the year annual US trade gap could be heading towards $720-billion-plus mark.

In Europe, major economies are facing inflationary pressure as the petrol price is now reaching Rs 42.50 per litre equivalent mark at petrol station forecourts.

With rising interest rates and record high oil prices, analysts are predicting "stormy weather" ahead in key stock markets.

However, the silver lining is that major companies are likely to report better profit figures and in this background, oil price surge is still widely rated as a "pain but not shock".

As one financial analyst put it: " The stock markets follow corporate profits, not oil prices, not terrorism, not inflation... "

Such sentiments are based on company profits "showing healthy upturn" during third and fourth quarter this year.

At the consumers' level, the reality is that so far although European consumers have been spending freely in retail shops, stores and supermarkets, the current high cost of petrol has dampened their outlook.

Hence, it is argued that the scenario can change dramatically before the end of the year as the ever widening and record high American trade deficit is looming menacingly on markets on both sides of the Atlantic.

The most familiar question asked is how long can Americans continue to buy overseas than they sell and ruthlessly borrow foreign money to pay the bill or balance the books.

Many foreigners are already jittery about their dollar investments but dollar is displaying remarkable resilience despite such sombre forebodings.

If foreign investors cut their support from dollar interest rates will move higher.

Some analysts now predict US interest rate hitting near the 6 per cent mark by the end of this year or beginning of New Year.

The OPEC members are producing record high volume of oil and are enjoying benefits of record high oil prices.

They are also on a record spending spree — mainly real estate, sky-scrappers — Dubai alone is building 37 — and luxury shopping malls, the like of which has not been seen in the rich oil producing Arab countries for some time.

The "futures market" in oil is a new factor. According to one estimate $2 billion have now entered oil futures market and this factor may push the oil price to $70 per barrel and beyond.

The US and China are world's largest guzzlers of oil and demand in this region is still rising fast. China's economy is developing at a record pace and Chinese economic growth may reach 10 per cent mark by end of 2005.

Russia, Western Europe and India are rated as "modest" consumers of oil but domestic demand in this region is also rising.

But the US trade deficit coupled with prospects of economic recession on both sides of the Atlantic will ultimately determine the global oil prices, interest rates and above all investment prospects.

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