The large-scale air strike against two oil refineries belonging to Saudi Aramco is a thorny issue for the Trump administration and bad news for the global economy. The output shortfall as a result of this attack is estimated at 5.7 million barrels of crude oil per day, equating to almost half of Saudi Arabia’s production and to 6% of global output. As a consequence, the price of oil had shot through the roof and is set to continue hovering high in the near term, underpinned by precautionary buying.

The blame has again been squarely laid on Iran, which has allegedly been a behind-the-scenes player in over 100 attacks on Saudi Arabia. Trump has hinted at a possible military response and has authorised opening up strategic oil reserves in the event of shortages. Even though the global economy is less dependent on fossil fuels than during oil crises of the 1970’s, fears of spiralling conflict in the Middle East are stoking uncertainty in financial markets by undermining confidence among consumers, corporations and investors. That could represent a further hit on economic growth.

In the US, a string of better-than-expected indicators has soothed fears somewhat. Retail sales rose by 0.4% in August and consumer sentiment was stronger than expected. In China, however, industrial production increased by ‘only’ 4.4% year on year in August, the smallest gain in 17 years, suggesting a further slowdown in GDP growth. Furthermore, it raises the likelihood of more doses of monetary easing from the People’s Bank of China.

Central banks around the globe continue to loosen policy. The ECB is pulling on several levers: the first is a 10bp cut in the deposit rate; the second is resumption of quantitative easing, here an open-ended scheme for purchasing EUR 20bn in debt securities starting on 1 November. The ECB also cut its Eurozone growth forecasts to 1.1% in 2019 and 1.2% in 2020. The consensus expects a 25bp reduction in the Fed Funds target range on Wednesday and a continued dovish slant in the months ahead, even though consumer price inflation in the US is hurtling along at 2.4%, leading to a steepening in yield curves.

If you have any questions please contact the office on (03) 9670 6070.