Global equities have been in a corrective phase over the past few weeks amidst soaring oil prices and the intensifying turmoil in Libya and the Middle East. The correction, however, has been shallow.

The crisis in the Middle East will likely not be resolved easily, which will continue to threaten the oil market stability. However, there are still significant amounts of cash sitting on the sidelines, ready to buy into stock markets on price weakness. It could be a tug-of-war environment for a while.

Our base case is that the primary uptrend in stocks remains intact and oil prices at current levels are not yet high enough to spoil the equity party. However, the oil market will continue to be a key source of financial market volatility and therefore, needs to be monitored very carefully. If Saudi Arabia is also drawn into major social upheaval and chaos, a catastrophic rise in oil prices will be entirely possible. At present, this is not our expectation.

Food inflation

Food and energy are necessities and naturally a sharp increase in their prices tends to amplify the inflation anxiety among the public. In reality, however, underlying inflationary pressure in the G7 countries remains very low.

The panic and sweeping reaction to rising food prices around the world is probably indicative of the fact that global food prices are nearing a top. The so-called “hog-cycle” is already at work: Farmers around the globe are aggressively planting their crops today in response to current high prices (see chart 1). The general rule is that the higher the prices today, the higher the risk of a supply glut in the coming harvest season. It is therefore reasonable to expect food prices to start declining over the coming twelve months, barring bad weather negatively impacting the main agricultural areas again.