Oil Prices – Impact On Equity Prices & Risk Tone
A quick question from Stewart asking would a substantial rise in oil prices cause equities to rise, hence a risk on environment?
Now, the first and most obvious ways that commodity prices can effect equities is due to the makeup of the various stock or equity indexes, for example many of the most weighted companies in some of these equity indexes will be energy companies or mining companies like Anglo American or BPS just few examples.
The stock prices of these type of companies are largely going to be dependent and influenced by the price of the underlying commodities that they deal with. For example, if commodity prices like base middles or fall that’ll see downsiding in stock prices for mining companies and if oil prices for example fall like we saw over the last couple of days or weeks that’ll see downsiding the stock prices for energy companies and vice versa.
Apart from that as a high risk asset commodities tend to also follow the resturn just like equities, so in a similar way to equities. As equities move in a risk on environment appreciates in a risk on environment, we’ll expect commodities to also appreciate in a risk on environment and will expect both of them to depreciate in a risk off environment.
Big moves in either asset clause whether that is equities or commodities can have a ripple effect and a transmission effect into other asset clauses not only equities and commodities but also as it feeds through to currencies as well. However, there can be times when asset clauses do not follow each others lead when big moves in equities might not effect commodities and currencies and vice versa.
Now that usually happens when they are overarching themes that might be driving the market as a whole. While they are individual factors driving a specific commodity like oil.
So to your question with a big rise this week in oil prices from a possible deal in OPEC whether that would cause a rise in equities the answer is that it could potentially cause a risk on moody in the market but we also need to consider the other factors at play at that time like the Coronavirus.
So if oil prices see a substantial rise but we see at the same time extremely bad news on the Coronavirus front then we might see oil prices gain while at the same time see other commodities like copper sell off along side equities and other high risk assets.
I do hope that helps you if there is anything else don’t hesitate to ask.