M a r k e t B u l l e t i n Wednesday 17 December 2014 Putting the oil into turmoil In 2011 and 2012, gold was the commodity that divided opinion; everyone was either a bull or a bear, with little room in-between. In the last three months of 2014, the price of a barrel of oil has become the commodity market ‘water cooler topic’ of choice. An accelerating slide in oil prices triggered broader turmoil across international financial markets on Friday, capping a week that saw investors shun shares and corporate bonds in favour of lower-risk assets. Against the backdrop of a huge economic readjustment, the debate, and the subsequent unease amongst investors, centres on whether falling oil prices are a good thing or a bad thing. Investors are either worried about falling Chinese demand or encouraged by the potential upsurge in US consumer spending as a result of lower energy costs. Last week’s turmoil suggested that, at present, the market is choosing to fret over slowing Chinese manufacturing rather than to cheer on reviving American consumers. The International Energy Agency cut its demand growth forecasts for 2015, stating that lower prices are still not stimulating demand. These comments had the subsequent impact of sending the price of crude oil to a five-year low, bringing the weekly decline to more than 10%. Brent crude, viewed as the benchmark for global oil prices, has fallen 45% since the beginning of June and stood at $61.95 per barrel at the time of writing. The slide has seen investors worry that a prolonged decline could have ramifications for consumers, industry and central banks, as oil links through the financial system. While lower oil prices could be seen as a boon for consumer spending in the long term, markets fretted over concerns that the fall in price is not solely due to oversupply, but in fact signals a sharp fall in demand which would suggest that the global economy is stuttering. The speed of the descent has impacted broader markets, with equity markets falling throughout the week and the global energy sector falling more than 17% since October. US corporate bonds have also been impacted, with some junk bond yields reaching levels of 7%. In the meantime, investors have sought safety in government bonds; the 10-year US Treasury yield fell to 2.1% and the 10-year German Bund yield fell to a record low of 0.63%. In the UK, the FTSE 100 fell 2.5% to 6,300.63 on Friday, completing five days of negative returns and leaving the index down 6.6%, its toughest week since August 2011. Despite the short-term worries, the CBOE VIX index, the ‘fear gauge’ of equity market volatility, registered a level close to its long-term average, despite being up 63% from the week before. So, whilst the latest bout of market volatility is unsettling for many investors, it is not unusual and needs to be put into the context of the relatively benign period of the last few weeks. Elsewhere in the world, other equity markets fell and many oil-exporting nations are being hurt, particularly through their currencies. The Russian rouble, for example, fell another 2% on Friday to a record low, despite the country’s central bank raising interest rates to 10.5% in an attempt to protect the currency. Greek vote In addition to the oil situation, renewed nervousness over the future of the eurozone also added to investors’ worries. There is rarely a time when the European economy isn’t an issue, but this coming week will see a snap presidential election in Greece. Defeat for the candidate of Antonis Samaras, the prime minister, could mean a general election within weeks. The anti-austerity SYRIZA party is leading in the polls and investors are understandably concerned. SYRIZA was the most vocal of parties at the height of the eurozone crisis, campaigning on a message that Greece should exit the euro and refuse to pay its debts. A victory for SYRIZA would create the uncertainty that markets hate. The Greek equity market has already fallen 20% since the elections were called. Greek government debt has also fallen, with 10-year yields now above 9% for the first time since early 2012. Commenting on the impact of lower oil prices on the outlook for European equities, Stuart Mitchell of S. W. Mitchell Capital, manager of the St. James’s Place Continental European fund, stressed the importance of cutting through the short-term noise. “The recent, almost 10%, fall in the value of the euro against the dollar should help support the export sector in Europe. The sharp fall in the oil price should likewise help to stimulate growth going forward.” Majedie Asset Management also said last week: “As far as we are concerned, this is good news for the European consumer, where we have been adding exposure in recent months to good effect. We have added to areas such as travel stocks, which are clear beneficiaries of the lower oil price, at the expense of integrated oil companies and some utilities. However, we remain cautious on emerging markets - a slowdown would be good news for the Western consumer in pushing commodity prices down further.” Abe’s gamble Another active central bank in recent weeks has been the Bank of Japan, whose ultra-accommodative monetary policy is part of Prime Minister Shinzo Abe’s strategy for tackling deflation and boosting the economy. Japan is the third largest economy in the world but has struggled for decades. This weekend saw Japanese citizens go to the polls as Mr Abe sought a fresh mandate to continue his ‘Abenomics’ programme. Heavy snowfall in large areas of the country added to voter apathy and the resultant turnout of 52% was the lowest since 1947. However, Mr Abe’s Liberal Democratic Party, in coalition with the Komeito party, achieved a decisive victory, winning 326 out of 475 seats. Finance Minister Taro Aso claimed that the win “shows that voters evaluated the Abe administration over the past two years positively”. Shinzo Abe was only elected in 2012 but had taken the calculated measure of calling a snap election to boost support for his steps to revive the domestic economy. After an initial burst of growth in 2013, Japan fell into recession in the third quarter of 2014 as, following a sales tax hike, housing and business investment dropped; which prompted further increased public spending and printing of money. Japan faces many problems, not least an ageing workforce, massive public debt and a huge pension deficit. Among Mr Abe’s other pledges were promises to help more Japanese women enter employment by tightening anti-discrimination laws, as well as the setting of employment targets. In response to his victory, he said: “My ‘Abenomics’ policies are only half done… I am aware there are still a lot of people who are not yet feeling the benefits, but it is my duty to bring benefits to those very people.” The recent volatility in markets is unsettling but it is not unusual. Investors who hold the appropriate level of cash to meet short-term needs, and maintain a well-diversified portfolio for longer-term goals will be more cushioned against market volatility.
Posted on: Wed, 17 Dec 2014 11:09:35 +0000
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