Oil prices surge, raises spectre of inflation
Other | Photo Credit: Reuters

World oil prices surged today after non-OPEC producers struck a deal to cut output, while Europe's main stock markets were subdued before a key Fed meeting due this week.

Indices in London, Frankfurt and Paris pulled back after soaring last week when the European Central Bank decided to extended its massive quantitative easing (QE) stimulus to December 2017.

At the same time, markets are on tenterhooks before a widely-expected interest rate hike from the US Federal Reserve on Wednesday.

"Markets are taking a breather after a strong run... and Fed risk this week," City Index research director Kathleen Brooks told AFP.

"Oil is in focus, so too is central bank risk, but overall we think it is low (trading) volumes as markets wait for the Federal Reserve before piling back in -- or not, depending on the outcome." 

Oil prices surged over two dollars per barrel after 11 non-OPEC countries agreed to huge cuts in crude production, while OPEC kingpin Saudi Arabia also signalled a bigger reduction in output than previously agreed.

The non-OPEC oil producing nations, led by Russia, said they would pump more than half a million fewer barrels a day from next month in an effort to address a supply glut that has scythed prices over the past two years.

That gave a shot in the arm to the energy sector because rising oil prices translate into higher revenues and profits.

"It is a little surprising that investor sentiment is not more upbeat... given the latest leg higher in the oil price," noted XTB analyst David Cheetham.

"The main scheduled event that will be driving markets this week is the Fed meeting." 

There seems little room for doubt that the US central bank will raise the benchmark interest rate in the coming week for only the second time in a decade.

With unemployment at a nine-year low, jobs being created at an average of 180,000 per month, the economy growing at better than three percent in the most recent quarter and some signs of a pickup in inflation, the writing is on the wall.

The Dow held steady in opening trade today, but the S&P 500 and Nasdaq Composite both retreated from record closes set on Friday.

Elsewhere, there is lingering uncertainty over the future of Italy's troubled Monte dei Paschi di Siena (BMPS) bank.

"Equities (generally) have made a poor start to the week despite a non-OPEC oil production cut pledge that bolsters OPEC's own key promise, designed to maintain an oil price recovery," said Mike van Dulken, head of research at trading firm Accendo Markets.

"A lack of Monte dei Paschi rescue over the weekend has dampened sentiment somewhat, leaving the bank and troubled peers as an outstanding risk issue."

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