Record oil prices take their Toll

US

Record oil prices have taken a toll on the US stockmarket this week. Brokerage houses have been increasing their predictions for oil prices. Goldman Sachs says that it believes that oil prices will be at $200 US barrel by 2010. That’s $70 US barrel or 35% higher than current prices.

Ford Shares fell this week after the company scrapped its long term plans to return to profitability in 2009. The company citied strong energy prices and rising steel prices as reasons and will be looking at cutting production of trucks, vans and sport utility vehicles.

Home Depot and Target fell this week on the back of weaker profit results. Home Depot saw a 66% decline in 1Q net income.

Federal Reserve cut its 2008 growth forecast and warned of higher unemployment, reducing prospects of an interest rate hike later this year. Fed lowered its 2008 growth projections dramatically from 1.3%-2% made 3 months ago down to 0.3%-1.2% from its estimate. Inflation risks have increased, with the Fed raising its core inflation forecast to between 2.2%-2.4% from between 2.0%-2.2% previously.

Asia

BOJ meeting saw interest rates remain unchanged at 0.5% as expected. The Japan Tertiary index for March which measures the service sector rose by 0.3%. The market was expecting a rise of 0.5%.

Coal miners in Australia have been outperforming this week on expectation of more takeovers in the sector. This week, AcelorMittal took a 14.9% stake in Macarther Coal which has sparked expectations of a full takeover bid in the future.

The high oil prices have pressured transport stocks. Qantas and Jetstar are planning to slow the speed of their plans in order to conserve fuel.

UK

Air France is the latest casualty of high energy prices with the airline issuing a profit downgrade.

German business confidence saw an improvement with a reading of 110.1 when the market was expecting 108. However, the improvement in these numbers seems a little strange given the weakness in other manufacturing data. The Eurozone industrial orders dropped 1% in March.

The expectation is that we could see Eurozone interest rates rise higher. The President of ZEW predicted that the European Central Bank could raise interest rates.

End note

Oil prices up 38% since the beginning of the year and up 104% in the last 52 weeks. The story of the past month has been the sudden surge in demand in China for diesel fuel. Power plants in some areas of China are running desperately short of coal and certain earthquake-hit regions are relying on diesel generators for power. But the International Energy Agency is warning of a severe oil-production crunch. It is worried that demand for oil will outstrip world supply and is preparing a landmark revision of its closely watched forecasts. Financial stocks have continued to be bearish with analysts predicting that there is more to come of the credit crisis and that trading houses could still face losses. Commodity based currencies and stocks have been the place to be this week with many oil stocks hitting new record high prices and the Australian dollar now moving towards parity with the US.

Happy Investing!