Oil rout rattles markets as Fed rate hike looms
ASIAN STOCKS UNDER PRESSURE AS CHINA GUIDES YUAN LOWER
Volatility swept through world markets yesterday as a renewed slide in oil and weakness in credit markets hit stocks, weighed on bond yields and added to the nervousness already building ahead of an expected US interest rate hike this week.
European stocks wiped out earlier gains to trade in the red by midsession, while US futures turned flat. Brent crude tumbled 3.4 per cent to trade as low as $36.62 (Dh134.50) a barrel, its lowest since December 2008. A fall below $36.20 will take oil prices down to levels not seen since 2004.
Jitters in high-yield bond markets, which are among the most vulnerable to higher US rates, also rattled investors. Lucidus Capital Partners has liquidated its entire portfolio and plans to return the $900 million it has under management to investors next month, according to a media report.
Earlier, Asian stocks and emerging markets had come under pressure after the People’s Bank of China continued to guide its currency lower, setting the yuan/dollar official midpoint at its weakest since July 2011.
Perfect storm
“It’s a perfect storm — the high yield sector and the fact that oil prices are unable to find a bottom — and has left investors floundering for any good news,” said Brenda Kelly, head analyst at London Capital Group.
US stock futures pointed to a flat open on Wall Street. On Friday, the Dow sank 1.8 per cent and the S&P 500 lost 1.9 per cent. Both indices are in the red year-to-date, on track for their first annual decline since 2008.
Talk of so-called “currency wars” picked up again after China’s decision to loosen its grip on the yuan and allow slow but steady depreciation in recent weeks added to concerns that the economy may be more fragile than expected.
China late on Friday launched a new trade-weighted yuan exchange rate index. Beijing said it was intended to discourage investors from exclusively tracking the yuan’s fluctuations against the greenback.
Data on Saturday painted a slightly brighter economic picture, however. Factory output growth accelerated to a fivemonth high, while retail sales rose at an annual 11.2 per cent pace, the strongest this year.
Spot yuan fell to as low as 6.4665 to the dollar, its lowest since mid-2011, taking its losses far this year to about 4 per cent.
Pick up a newspaper anywhere in the world today and you are likely to see a prominent story about low oil prices, the impact this is having on economies, and speculation about where the price might end up at some arbitrarily chosen point in the future.
Given that major investment and budgeting decisions, both in the public and private sectors, are reliant on where the price of oil stands, we should not be surprised that policymakers and business leaders are eager for that critical piece of insight and guidance.
For this reason, the recent Apicorp Energy Forum was an important opportunity. The combination of themes it covered — policy, outlook and finance — along with the sheer number and variety of senior energy industry stakeholders it attracted, made it a multifaceted and unique occasion.
High-profile policymakers and ministers shared a platform with experienced bankers and finance professionals, respected researchers and analysts, and business leaders from across the private sector. There have been few, if any, other opportunities since the oil price started tumbling last year, to tap into such a wealth of knowledge and expertise in the one place.
The views expressed during the forum are the ones I would encourage global decision-makers — and indeed the media — to pay particular attention to.
And while no one has a crystal ball when it comes to predicting oil prices, some people have better information than others.
One of the key takeaways was that most believe the days of $100 (Dh367.30) oil are over; 91 per cent of the circa 350 delegates polled during the forum said that the Brent oil price will remain below $70 for the coming 12 months.
However, there was a broad alignment of views that it will rise from the current lows of $40 a barrel.
Most see the oil price settling around $65 a barrel in 2016, which would certainly ease some of the current financial strain some governments are facing.
Spending commitment
Another takeaway was that investment in the Arab energy sector will continue, regardless of the current fiscal pressures. Oil ministers from Saudi Arabia, Bahrain and Egypt all expressed a clear commitment to ensuring spending on energy-related infrastructure, skills and technology are maintained.
There was also broad acceptance that investment in the Mena energy sector will need to total $685 billion over the next five years; and that cooperation between Arab states will be critical for these investments to progress.
How oil-exporting countries can best deal with lower revenues was also addressed at the forum — 45 per cent of the experts gathered stated that diversification was the best means of dealing with the issue. This was followed by 34 per cent who favoured subsidy reform. Only 16 per cent see spending cuts as the preferred option.
The truth is a combination of all three policy options is most likely needed.
However, without wanting to speculate too much, clearly if this is what the energy industry’s experts are saying, one should be reasonably safe to assume all of these options are being considered by the relevant policymakers.
This information should be reassuring to the markets. Expert advice and research is clearly being made available, and indeed has been provided, to those making government policy.