PR: Even A Fall In the Oil Price Is Bad News For the Eurozone
Here is an early section from this informative article by Roger Bootle for The Telegraph: Much of the world’s economic history over the past 70 years can be told in relation to movements of the oil price. After 1945, there was a long boom characterised by rapid economic growth, relatively low inflation, stability, exchange rate fixity and full employment. This came to an end in 1974 when the oil price rose from $2.5 per barrel, where it had been pretty much throughout the post-war period, to $15. This brought the world into an altogether new state: inflation rose sharply, exchange rates gyrated, growth faltered and unemployment soared. The era of stagflation was born. Another sharp hike in oil prices in 1979-80 brought another inflation spike and another economic downturn.
Economic recovery in the 1980s owed much to the subsequent sharp fall in oil prices. Since then, they have been up and down, again with significant impacts on the economy. Most importantly, they rose to $143 per barrel just as the world was entering the financial crisis of 2008-9. The reason why the world economy was so weak in the following years is that it had been hit by a double whammy – the worst financial crisis since the 1930s and a huge rise in commodity prices, led by oil. So the news that last week oil prices fell to $78 per barrel, the lowest since 2010, was highly significant. Moreover, there is a good chance that they will fall much further.
Mind you, it is important to recognise that movements in oil prices can be both cause and effect. Other things equal, weaker economic growth reduces the demand for oil and hence tends to lower its price. Lower prices originating in this way aren’t so much good news as a mitigating factor to what would otherwise be bad news.
Yet sometimes oil prices can fall because more oil becomes available, or available more cheaply. This is a supply shock. Both demand and supply elements are at work now but the current low prices seem to be mainly the result of a favourable supply shock, partly associated with the US fracking boom.
David Fuller's view
There is some important market history in the three paragraphs above, although I believe the headline is misleading.
For decades I have referred to a spike in crude oil prices as an economic ‘game changer’, having a greater impact on GDP growth than almost any other factor. Now, as we approach the mid-point of the current decade, I believe the risk of an upside oil price ‘game changer’ is significantly lower than at any other period for over a century.
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Russia Seen as Biggest Threat in Poll Even as Oil Erodes Putin Power
Here is the opening from this assessment of the poll by Bloomberg: Russia poses the biggest security risk to world markets and will be the biggest loser from the drop in oil prices, according to a Bloomberg Global Poll of international investors.
Asked which of five possibilities posed the greatest risk to global financial markets, 52 percent of participants chose the Russia-Ukraine conflict. Twenty-six percent cited Islamic State, while Ebola barely registered with 5 percent. The U.S. was seen as the most likely beneficiary from lower crude prices.
Russia is being buffeted by the twin blows of sanctions and an oil-market selloff that threatens to hollow out its economy. While the country is menacing Ukraine with tanks and sending its jets into foreign airspace, President Vladimir Putin said Nov. 14 that the drop in crude is potentially “catastrophic” for the world’s largest energy exporter.
“The Russia-Ukraine situation is more dangerous as we have a sovereign state, which is trying to increase its power by creating chaos both through threatening actions of war,” Mikael Simonsen, chief sales manager for cross asset sales at Nordea Bank in Helsinki and a poll respondent, said by e-mail. “This might impact the common thinking of how developed we are today, and impact the risk premium.”
David Fuller's view
Russia’s economy is in meltdown, due to bad management from Putin, international sanctions against his regime and the slump in oil prices. This is reflected by Russia’s RTSI$ Index and the Ruble, shown inversely against the USD. However, Russia’s military remains the third strongest in the world, and Putin wants to intimidate us with this power. It is a war of attrition which the democratic West can win, if it holds its nerve.
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Email of the day
On Friday Audios, etc.:
“hi David always enjoy listening to your friday audio. by the way for me it is never too long. Following, i was wondering what could have been the trigger for oil/ gold /silver etc to reverse and go up this Friday? the first warning sign you mentioned was the reversal on nov 7 but today was an impressive reversal. So my question is: Could it be that the lower yield on the US 10yr Treasury Bond Yield which started to go lower on thursday and again yesterday caused the usd to weaken and therefore caused commodities to go up? i know the interest rate change looks minor but if i look at your charts the commodities were at their lows in the beginning of the trading day and went up when the interest rate went lower. would appreciate your expert opinion . On European autonomies, despite the fact valuations might be low for companies. The high energy costs for companies and consumers hardly decreased because of the stronger usd and the high percentage of taxes. That destroyed the advantage of lower Brent prices almost completely ironically the lower energy costs give US companies and consumers a huge and even greater advantage over European companies and consumers. i rather buy shares of Dow Chemical than Basf and probably also enjoy an additional advantage of an appreciating usd versus the euro. In this beauty contest it is hard to favor European shares over US shares or Asian shares. best regards”
David Fuller's view
Thanks for your comments and perspective. Living in the Eurozone, I can certainly understand why you prefer Dollar-denominated investments.
Re commodities, many of them have been technically oversold and I agree that when the USD weakened from an intraday new recovery high, that led to some short covering of depressed resources on Friday.
This item continues in the Subscribers’ Area.
Modi Moves Like Jagger as Indian Diaspora Flocks to Sydney
Here is the opening of this informative article from Bloomberg: Narendra Modi took center stage today at the same Sydney arena where The Rolling Stones played to sell-out crowds last week, as thousands of supporters flocked to hear the Indian prime minister speak.
Following on from his address to the Indian diaspora in New York’s Madison Square Garden in September, Modi addressed 21,000 people at Sydney’s Olympic Park where he promised visas for Australian tourists would soon be made available on arrival at Indian airports. Among the crowd were 220 Indians who chartered a train dubbed the “Modi Express” for the 12-hour journey from Melbourne to the event.
Modi’s trip to Australia, where he attended the Group of 20 summit in Brisbane at the weekend, came six months after his landslide election win and is the first bilateral visit by an Indian prime minister since 1986, according to his Twitter feed.
“If you start from India at night, you reach Australia by morning, but the Prime Minister of India took 28 years to come,” Modi said to cheers and chants of his name. “I’ve come to assure that you will never have to wait for 28 years again.”
Supporters waved the nation’s tri-color flag and donned Modi masks and T-shirts as they made their way into the arena. The inside of the Modi Express was decked with saffron, white and green balloons and streamers, television images showed.
“Looks like it’s gonna be India day in Sydney tomorrow mate,” Syed Akbaruddin, a spokesman for India’s foreign ministry, said in a Twitter post yesterday.
About 300,000 people born in India live in Australia, according to the 2011 census. India is Australia’s 10th largest trading partner, accounting for A$12 billion in exports and imports, according to Australia’s Department of Foreign Affairs and Trade.
While Rolling Stones fans paid hundreds of dollars to see frontman Mick Jagger and the band, Modi’s community reception at the Allphones Arena is free -- funded by more than 200 Indian community organizations.
Modi is scheduled to address Australia’s parliament in Canberra tomorrow.
David Fuller's view
Narendra Modi is by far the most interesting political figure in the world today, as he strengthens ties with other important political leaders and reenergises Indian populations in their countries. One very smart, charismatic and media-savvy Prime Minister has transformed impressions of India and its potential in only a few months.
Peg worth its weight in gold: a detailed analysis of the Swiss gold referendum
Thanks to a subscriber for this report from Deutsche Bank which may be of interest to subscribers. Here is a section:
On 30 November, the Swiss will vote in a referendum to amend the constitutional mandate of the Swiss National Bank (SNB) with respect to its gold reserves. The proposal is that
the SNB never sells any gold reserves once acquired,
the SNB stores all its gold reserves on Swiss territory,
the SNB holds at least 20% of its official reserve assets in the form of gold.
Gold reserves would have to be repatriated within two years of the referendum, while the SNB would be given five years to align its gold reserves to the 20% minimum requirement.
The background to the proposal is concern among conservative observers that the SNB’s reduction in its gold reserves in recent years has constituted a plundering of the nation’s intergenerational wealth and economic status. The rationale behind a gold reserve ratio is the perceived association of gold backed currencies with price stability: the exogenously constrained supply of gold is hoped will restrain the central bank in its creation of fiat money.
Opponents of the proposal have warned against the constraints that would be placed on the SNB¡¦s monetary policy instruments. While the camps appear to have reached stalemate over the fundamental objectives of monetary policy, opponents of the “gold initiative” have argued that gold reserves in the central bank’s balance sheet yield no distributable interest and are excessively vulnerable to price shocks. Two-thirds of SNB profits have traditionally been distributed to the cantons and are an important source of regular income.
Eoin Treacy's view
A link to the full report is posted in the Subscriber's Area.
There are a number of moving parts to this argument not least because of Switzerland’s long history as a strong currency regime. The Austrian school of economics, which has a suspicious attitude to the inflationary bias of modern central banking is particularly strong among a certain segment of the Swiss electorate so there is a real possibility that at least some of the above measures will be adopted. Repatriating Swiss gold has obvious merit from a security perspective for example. However the other questions impose limits on the central bank’s ability to influence the currency market which would be a headwind for exporters. As a result they will be more difficult to pass.
Halliburton Agrees to Buy Baker Hughes for $34.6 Billion
This article by David Wethe and Tara Lachapelle for Bloomberg may be of interest to subscribers. Here is a section:
Both companies are hired by oil and natural gas explorers to drill wells and provide services such as hydraulic fracturing, or fracking, which cracks rock to let petroleum flow more freely. Together, the companies will dominate the $25 billion U.S. market for onshore fracking.
The merger also gives Halliburton access to Bakers Hughes technology to boost production in aging wells and its prized oil tools business.
The two companies restarted talks yesterday after initial discussions fell apart late last week, a person familiar with the matter said yesterday. Baker Hughes confirmed the takeover talks on Nov. 13 after media reports of a potential deal.
Talks collapsed a day later, and Baker Hughes released letters in which Craighead took Halliburton’s Lesar to task for refusing to raise his offer and pressuring for a hasty decision by threatening a proxy fight.
Eoin Treacy's view
If major oil producers cut back on drilling and exploration because they no longer believe oil prices will continue to trend higher, oil service companies necessarily run into trouble. Deep corrections have been evident on almost all oil service companies over the last couple of months as oil prices pulled back. This is creating interesting situations for expansion oriented boards that now see bargain prices among some of their competitors.
Shanghai-Hong Kong Stock Connect: For investing in SSE securities
Thanks to a subscriber for this note from the Hong Kong Stock Exchange which may be of interest to subscribers. Here is a section:
Under Shanghai-Hong Kong Stock Connect, The Stock Exchange of Hong Kong Limited (SEHK) and Shanghai Stock Exchange (SSE) will establish mutual order-routing connectivity and related technical infrastructure to enable investors in their respective markets to trade designated equity securities listed in the other’s market. Hong Kong Securities Clearing Company Limited (HKSCC) and China Securities Depository and Clearing Corporation Limited (ChinaClear) will be responsible for clearing, settlement and the provision of depository, nominee and other related services for the trades initiated by the investors in their respective markets. This brochure provides information for investors who want to use Shanghai-Hong Kong Stock Connect to trade equity securities listed on SSE.
