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Investors Shouldn't Convince Themselves the Worst Is Over

Investors Shouldn't Convince Themselves the Worst Is Over

Wednesday, 20 January 2016 10:29 AM Current | Bio | Archive

Once again it’s uncertainty and volatility that set the negative tone in markets all over the globe caused, unsurprisingly, by what’s going on with oil and in China.

The just released International Energy Agency (IEA) “Oil Market Report (OMR) for January" informed global oil demand came down from a near 5-year high of 2.1 million barrels per day (b/d) during Q3 of 2015 to a 1-year low of 1 million b/d in Q4 of 2015. The IEA OMR lowered its demand growth outlook for 2016 to 1.2 million b/d.

The OMR expects that about 300,000 b/d of extra oil could be flowing to the markets by the end of Q1 of 2016.

Interestingly, global oil supplies expanded by 2.6 million b/d in 2015 while global inventories rose by 1 billion barrels (!) in 2014-15 and the IEA expects inventories to rise further by about 285 million barrels in 2016.

The big unknown remains the amount of extra crude oil will Iran bring on the markets.

Please keep in mind Iran has a proven mindset it's disposed to sell its oil even at discount prices as it has tried to do during the EU Iran oil ban.

According to the IEA, Tehran could add 300,000 b/d to its exports at the end of Q1 and 600,000 barrels by mid-year. From its side, the Iranian government has announced it intends to reach one million b/d extra by mid-year, which would add an additional pressure to oil prices. The country was already pumping at 3-year highs of 2.91 million b/d in December.

Remarkably, U.S. oil supplies continued to grow in December, albeit very slowly.

For the time being the oil glut is set to remain with us for some time to come and because of that oil prices should remain bound for lower levels.

On China there are, at least in my opinion, no positive economic surprises to expect.
Kenneth Rogoff nailed it fairly well at the World Economic Forum in Davos today saying: “Anyone who is telling this time is different for China has his/her head in the sand.”

I’d like to add, just look at Chinese total debt as percentage to GDP that now stands at >230 percent and that has risen by about 40 percent since 2008 at the start of the Financial Crisis, which is certainly not a good number albeit not alarming, but the really worrisome component of that Chinese debt is the State Owned Enterprises’ (SOE) share, with their murky and un-transparent ways of doing business and of which many are factual bankrupt, that amounts to 100 percent of that total debt.

Investors should also better not overlook China’s GDP growth is continuously slowing and it is expected that will continue over the next few years.

Finally and for what’s it’s worth, Mark Hart, the hedge fund manager whose bets against U.S. subprime mortgages and European sovereign debt proved prescient, said China should weaken its currency by more than 50 percent this year.

I wouldn’t be that extreme, but if all the undertakings of the Chinese authorities don’t work, as has been the case till now, I wouldn’t exclude a substantial weaker Chinese currency over the near term, and if it would weaken over a relatively short time span, we probably would have to face a dangerous financial storm that could bring down, in serious proportions, values of many assets while it could also signal the ignition of a global currency war.

Let’s hope it doesn’t come that far.

Anyway, China’s markets were again firmly in the red.

Speaking at the World Economic Forum in Davos, Switzerland, the Swiss UBS Group AG Chairman Axel Weber, who was President of the Deutsche Bundesbank and member of the European Central Bank Governing Council from April 2004 to April 2011, gave his personal interesting views on what’s going on these days, “We’re going through a correction and clearly global growth has come down. The world is reverting to the old order. The U.S. is leading the cyclical recovery, industrial countries are doing better than emerging markets and emerging markets are seeing the reversal of capital flows. It’s a normal correction, it will last for some more time.”

On monetary policies he said: “We face a policy-credibility issue nowadays in the global economy because the guidance given by central banks first and foremost isn’t taken at par value by markets and that’s where markets get very jittery and nervous. You have to be very clear and very determined in your guidance.”

Investors could do well not convincing themselves the worst is over.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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Once again it's uncertainty and volatility that set the negative tone in markets all over the globe caused, unsurprisingly, by what's going on with oil and in China.
investors, stock market, fed, dollar
Wednesday, 20 January 2016 10:29 AM
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