Sunday, March 6, 2011

Libya and oil prices pull US markets lower

US markets were down on Friday, as fighting intensified in Libya and WTI crude surged above US$100/barrel once again. The S&P 500 lost 9.82 points or 0.74% to 1,321.15, while the Dow was down 88.32 points or 0.72% to 12,169.88. On Friday, Brent crude surged above $116/barrel, while WTI crude rose above $104/barrel. For the week, the S&P 500 edged up 0.1%, while the Dow rose 0.3%.

Oil pulling markets down while jobs pushing markets up

As oil prices continue to rise, investors are becoming concerned that it would cut economic growth. However, the jobs report on Friday was a strong positive for markets.

The Labor Department reported a payroll increase of 192,000 in February, which was higher than the 185,000 that economists expected. In addition, the unemployment rate fell from 9% to 8.9%, which was lower than the 9.1% expected. The unemployment rate has continued to fall since the 9.8% in November.

However, some economists argue that if February job gains were averaged with January's gain of only 63,000 jobs, then the numbers would be far less impressive. In addition, there is the possibility that the unemployment rate could edge higher in the coming months, as people who had given up looking for a job enter the labour force.

Nevertheless, February's job gains and the unemployment rate were impressive. If high oil prices were not in the backdrop, markets would have headed much higher on Friday.

Looking ahead to next week

If oil prices continue to rise next week, then investors can expect to see markets heading lower. With WTI crude above $100 and Brent crude close to $120, the prices have risen 50% in the past year. They are in dangerous level that will start to impact economic growth. Gold can be expected to continue to do well if the oil price stays high, since investors will be looking to hedge inflation.

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