Sign in to follow this  
Followers 0

Hubble Bubble, Oil and Trouble


GodfreyO
  • “We really can't forecast all that well, and yet we pretend that we can, but we really can't.” Alan Greenspan, former Chairman of the Federal Reserve Bank.

    It wasn’t meant to be like that. A new year and a fresh new start was supposed to be the narrative. The Fed starts its rate rising cycle into an unassuming, benign environment. Well, it seems stock markets around the world simply haven’t been listening.

“We really can't forecast all that well, and yet we pretend that we can, but we really can't.” Alan Greenspan, former Chairman of the Federal Reserve Bank.

It wasn’t meant to be like that. A new year and a fresh new start was supposed to be the narrative. The Fed starts its rate rising cycle into an unassuming, benign environment. Well, it seems stock markets around the world simply haven’t been listening.

It was only months ago that we were celebrating multi-year highs across a number of global indices. Now all the talk is about guessing which stock market will next fall into bear-market territory. Whether it’s China, the UK, Japan or Australia, all regions have markets at least flirting with the 20% decline from their peaks that would define such a slump.

And the negative headlines continue: “India hits a 20-month low”, “The S&P 500 declines to a 21-month low”, “Hong Kong’s Hang Seng Index falls to its lowest since 2012.” It’s been a bit of a bloodbath, laced with a margin call/liquidation feel about it. VIX, the “fear index”, has jumped over 50% this year. Throw in the hits to high yield currencies and commodities, and a lot of investors are feeling a little nervous right now.

So what’s driving this? In a nutshell, wherever you live in the world and whatever your geographic market bias, it’s back to stressing how much we live in an interconnected world.

One of the biggest headline grabbers of late has been the collapse in the oil price. The West Texas Intermediate (WTI) grade has fallen more than 25% so far this year and now sits below $27 a barrel for the first time since 2003. 18 months ago we had $100 oil and all was right with the world.

The trouble with what's happened with oil of late is that it encapsulates a number of different concerns: economic growth, politics, geopolitics, and corporate debt.

On the global economic front we’ve got China’s slower growth story continuing to unnerve investors. Whether the data coming out of the country can be trusted remains open to debate. Critics only see exaggeration. Nonetheless, the 6.9% growth figure China released for 2015 did fall short of 7% government estimates, was below the 7.3% for 2014, and marked the slowest rate in 25 years. Analysts forecast 6.5% for 2016, which wouldn’t be much of a problem if the rest of the world hadn’t become so reliant on this economy to take up the global growth slack. And a slower-growth China also means lower demand for oil.

Not only is the oil space being hit by a weaker demand environment, it’s also facing a new wave of supply coming onto the market. In the US, Congress voted in December to lift a 40-year ban on crude oil exports as part of a broader spending bill that averted the possibility of a government shutdown. The legislation will finance the government through September 2016. The political compromise is proving to be unfortunate timing for the oil market. Who knows what the changing of the presidential guard in the US this year will do for future energy policy?

Events in the Middle East have also added to the oversupply dynamic. Diplomatic relations have become even more strained than normal between Iran and Saudi Arabia, the world’s largest oil producer. Unfortunately, this is also playing out messily when it comes to oil. US and European Union sanctions have recently been lifted on Iran, restoring the country’s access to world markets. With the country planning to immediately ramp up oil production by 500,000 barrels per day, it aims to boost output by as much as 1 million barrels within a year. Rather than trying to support oil prices by cutting output, Saudi Arabia seems set on maintaining levels and market share to nullify the Iran threat. So for expediency’s sake, Saudi Arabia appears happy to keep oil prices low to hurt Iran. That’s how it appears anyway.

And then there’s the issue of debt. In the post-financial crisis world, banks had to rebuild their loan books with safer, more reliable borrowers. It was time to step away from the consumer and target corporates. What could be safer in a low interest rate environment than energy companies looking to expand production into new growth markets with the oil price at $100? Well, it’s become a bit of a perfect storm – interest rates are rising, the strong dollar is impacting the value of overseas earnings, emerging markets aren't emerging so much and we all know what’s happening with the oil price. So this is could become an earnings concern for coming quarters – will banks struggle with escalating defaulting loans from energy companies?

So investors have plenty to think about. With the beauty of hindsight a number of commentators have come out to say that the Fed shouldn’t have raised rates at all in December. The counter to that view is that markets are telling a different story to the broader economics, which really aren’t that bad. Yes, China’s expansion has slowed but that’s not new news, while the US has been showing steady if unspectacular growth.

But this is very much a sentiment-driven market. And sometimes sentiment can make certain scenarios self-fulfilling. Understandably money is flocking to gold and other safe havens. There’s also plenty of cash sitting on the sidelines, waiting. Who knows whether in five years’ time we’ll even remember any of the current narratives. For now, though, it’s not a time to panic. Keep calm, carry on and make the most of the cheap flights the oil price should give us.

1


  Report Article
Sign in to follow this  
Followers 0


User Feedback


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

 

 

 

  • Member Statistics

    717
    Total Members
    634
    Most Online
    GlenVerner
    Newest Member
    GlenVerner
    Joined


  • Featured Ad
  • Recent Status Updates

    • Rick

      Server Side and Software Upgrades - January 2017 https://t.co/bEabYfqYaG
      · 0 replies
    • theRASPYone

      USD/ EURO
      http://www.marketwatch.com/story/the-dollar-is-closing-in-on-parity-with-the-euroat-long-last-2016-12-15
      I was looking to post this in a forum in regard to Forex, which is something I wish I knew more about, because I feel it influences the overall markets, and I am only slowly learning about the subject. This article was really interesting, and it's a sign of the times to what may eventually be a market crash. The system is the same as it was before the housing crash. The market is just being blown back up. Since these currencies are traded and can be exchanged for one another, is that not a global currency essentially? If you got American $, your set anywhere you go for the most part. Everyone points to the US debt as a huge problem, and it sure is! But the dirtiest currency will fall first, and the European countries got it rough. They live in the shadow of the american dollar and get the short end of the stick. Watching the Euro will likely foretell the complete and bitter end of this astonishing Bull market, which might take a break and continue still for some years. Just and idea! 
      · 0 replies
    • Lacie  »  Rick

      Hi Rick,
      I am so excited that kingofalltrades.com is back up! I have checked back over the years, but there was no activity. Anyway, I am happy to be back and am excited to be in contact with you!! 
      ~Lacie
      · 1 reply
    • Lacie  »  Relmor

      Hi Relmor,
      So sorry, I have not responded till now. I have been crazy busy at work and have not had much free time! I was so excited that you all are back online. As I told you in my brief post, over the years I have gone to Kingofalltrades.com to see if anyone was around but there was nothing going on.
      Anyway, I wanted to touch base with you ~ right now I have to turn in. I have to be up at 3:45am for work! Talk to you later! Have a nice day!!
      ~Lacie
       
      · 0 replies
    • Rick

      New Membership Tiers Explained https://t.co/Z29yjcb4Gp
      · 0 replies