Markets Continue to Slide on Oil Shock -- Update

By Josie Cox 

Oil's persistent slide continued to drive global financial markets Friday, sending currencies in Russia and Norway to fresh multiyear lows, and stocks in energy companies tumbling.

In early trade, the ruble surpassed 57 against the U.S. dollar for the first time. Norway's krone hit a new five-year low against the euro and an 11-year low against the dollar as Brent crude slumped to $63 a barrel and West Texas Intermediate settled below $60--both five-year lows.

Russia's central bank on Thursday raised its key interest rate to 10.5% from 9.5%, and its deposit rate to 9.5% from 8.5%, in an attempt to halt the ruble's slide, but economists broadly agreed that wasn't enough.

"In my view the risk of a full-scale currency crisis is still high and the Bank of Russia may have to use all tools at its disposal to stem ruble rout," said Piotr Matys, a currency strategist at Rabobank. He said he had been expecting a 2.5-percentage-point increase in the key interest rate.

"The decision taken proved insufficient," he added.

The ruble was battered earlier this year by geopolitical tensions and resulting sanctions, but its decline has been exacerbated in recent months by the oil shock, especially after the 12-member Organization of the Petroleum Exporting Countries last month rejected calls for drastic action to cut their output. Around 50% of Russia's annual budget revenue stems from oil and gas exports.

Norges Bank on Thursday cut its key interest rate to 1.25% from 1.5% to combat slowing domestic growth, specifically citing the tanking price of oil. Norway is Europe's biggest crude exporter, and Norges Bank said in a statement Thursday that "activity in the petroleum industry is set to be weaker than projected earlier."

The Stoxx Europe 600 index was trading 1.5% lower midmorning, with major losers including Afren PLC, Genel Energy PLC, Tullow Oil and Petrofac Ltd. London's FTSE 100 index, with a very high exposure to the oil and gas sector was down 1.4%, putting it on track for its worst weekly loss in around two years.

The European subindex of oil and gas companies declined 1.8% and economists said that the chills were starting to filter into debt markets, too.

"Falling oil prices have sparked weakness in the U.S. high-yield markets, which amid thin liquidity is intensifying volatility across fixed income assets," Barclays economists wrote in a note.

The CBOE Volatility Index, commonly considered a fear gauge of financial markets, rose 8% overnight, reflecting investors' appetite for assets considered safest during times of stress. The yield on German 10-year government bonds hit a record low of 0.652%. Yields fall when prices rise.

Beyond oil, lasting jitters stemming from political uncertainty in Greece additionally pressured equities.

Earlier in the week, the Greek government announced that Parliament would vote on a new president on Dec. 17--two months ahead of schedule--to replace Karolos Papoulias, whose five-year term was slated to end in March.

The move sparked fears that Greece's radical left opposition Syriza party could win national elections if presidential voting rounds fail to find a solution acceptable to all.

"We wouldn't rule out the possibility that mainstream parties can cobble together the majority needed to win support for a presidential candidate. Nevertheless, the political outlook for Greece remains highly fraught," Citigroup economists write in a note.

Athens's main stock exchanged tumbled 7% on Thursday having already closed around 12% lower during Wednesday's session. On Friday it opened lower but later retraced some of that move, to climb around 0.7%.

The yield on the country's 10-year government bond stood at 8.9% Friday morning, around 0.08 percentage point tighter on the day. Only earlier this week, however, it was around 7.2%.

Write to Josie Cox at [e-mail]

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