FTSE 100 and oil prices falter as investors turn cautious

·3 min read
UK, London, blurred motion of incidental business people walking to work with view of the financial district behind
London's FTSE 100 dipped in mid-afternoon trade. Photo: PA

The FTSE 100 (^FTSE) sold-off sharply in London on Tuesday afternoon, after a weak open for US stocks and amid volatility in oil prices.

The FTSE 100 had fallen more than 1% by the close, having been flat for much of the session. On the continent, France's CAC (^FCHI) was 1.1% lower, while Germany's DAX (^GDAXI) fell 1%.

Neil Wilson, chief market analyst at Markets.com, told Yahoo Finance UK the sell-off was sparked by declining US Treasury yields, a sign of a flight to safety within markets that was hurting sentiment. 

"[A] big bid coming through for Treasuries hitting yields hard, and seemingly dragging down the FTSE with it," said Wilson.

Gold (GC=F) was also rallying in another sign of the risk-off mood among investors. The precious metal was up 1.4% to $1,808.10 an ounce.

Sentiment wasn't helped by a weak opening in the US after the Independence Day long weekend. The S&P 500 (^GSPC) dropped 0.6% and the Dow (^DJI) moved 1.1% lower. The Nasdaq (^IXIC) was almost flat.

Oil prices were volatile on Tuesday, following an aborted meeting of the Organization of Petroleum Exporting Countries and its allies (OPEC+).

Oil rallied around 1.7% in early trade on Tuesday to hit a seven-year high before retreating. Brent crude futures (BZ=F) had moved 1.2% lower by 4.10pm in London to trade at $75.23-a-barrel. Crude (CL=F) was also 1.4% lower at $74.09. 

The initial move higher had come in response to news that OPEC+ members were out of sync on production expectations. The cartel had been due to meet on Monday to continue talks on future production levels but a disagreement between the UAE and Saudi Arabia over production cuts boiled over and the meeting was cancelled at the last minute.

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"Some members of the group including Saudi Arabia had been hoping to increase production over the coming months, but the UAE had refused to agree and sought better terms that would change how its quota is calculated and allow it to produce more," Jim Reid, a strategist at Deutsch Bank, wrote in a morning note.

"At first glance a failure to agree supplies is bullish for prices. However, too big a disagreement could eventually lead to unilateralism amongst OPEC+ members and maybe notably higher supply as they break ranks."

Saudi Arabia raised the August official selling prices (OSPs) of all crude grades it sells to Asia, Reuters reported on Tuesday afternoon.

OPEC+ decided to slash production by nearly 10 million barrels-a-day last year as demand tumbled at the start of the COVID-19 pandemic. Oil prices have risen 50% since the start of the year as the world has begun relaxing COVID-era restrictions.

Naeem Aslam, chief market analyst at Avatrade, said some market participants believe oil could reach $100-a-barrel thanks to the momentum of the economic recovery and successful vaccine programmes.

"We have small players like the UAE flexing their muscles and not agreeing to a supply cut," Aslam said. "This is a matter of concern. 

"For the time being, it doesn’t look like that there may be a supply war, but oil traders must never forget the consequence of previous oil supply wars and the power that Saudi Arabia has in terms of its oil output production increase."

Bitcoin (BTC-USD) seesawed throughout the day. The cryptocurrency was trading up 1% by the close in London.

Overnight, Asian stocks were mixed. Guided by oil prices, Japan's Nikkei (^N225) closed 0.2% higher. Hong Kong's Hang Seng (^HSI) moved 0.3% lower and the SSE Composite (000001.SS) fell 0.5%. 

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