Global stock markets to start 2016 with a nose dive
FTSE 100 index ended 2015 at 6,242.32 and took a nose dive to 5,673.58 closing level on 20th January. That was a 9.1% drop in less than a month. As of 25th January, FTSE 100 recovered a little bit from the low and closed at 5,877. In the same period from 31st December, 2015 to 25th January, 2016, Eurostoxx 50 Index dropped 8.1%, Dow Jones dropped 8.8%, Nasdaq Composite dropped 8.7%, Japan Nikkei 225 dropped 10.1%, China Shanghai Composite dropped 17.0%. This is a truly global sell off and there is no escape. Institutional selling has to be part of it. What happened? Did Santa send the wrong presents to the fund managers? One explanation is the butterfly effect of falling oil prices is hurting oil rich countries war chest. Hence these countries are selling their mutual funds and overseas investment to make ends meet. Saudi Arabia has been withdrawing billions from markets and it is considering to list Aramco, its state-owned oil giant.
Oil price is at 13-year lows and went below USD 30 a barrel. US, Russia and Saudi Arabia are neck to neck as the 3 biggest oil producers in the world, each at above 10 million barrels per day. For countries like Russia, Saudi Arabia, Nigeria, Venezuela who are living off petro dollar, a lower oil price could also force them to sell more to maintain cash flow. The 13-member oil cartel OPEC led by Saudi Arabia abandoned its policy of restraining production to control oil prices in 2014 and some of these countries are pumping faster than ever to pay for their bills. Iran, with the world's forth largest oil reserve base, is ready to pump up its oil production as sanctions against it are lifted. Such increasing supply put oil price and producers' financial health in a downward spiral.
Let's also point fingers to US uplifted its 40-year ban on oil exports. US oil producers can export crude oil after a surprise change in policy that was strongly opposed by President Obama and fellow Democrats. In December 2015, politicians in US Congress made a compromise. Democrats agreed to lift the 40-year ban on US crude oil exports. Republicans agreed to extend tax subsidies for wind and solar by 5 years. The 30 percent tax credit for solar was going to expire in 2016 and the tax credit for wind expired in 2014. The effects of these policy changes are estimated to be USD 25 billion or the wind and solar energy sectors. Most US oil producers need oil price at USD 40-50 per barrel to have a profitable business. So with oil struggling at USD 30 a barrel, most US oil producers are not going to produce much and definitely not to export any oil overseas. However, this means oil price could be capped at USD 50 or so because US production can significantly increase supply when pricing is right.
As of 25th January, GBP lost 3.3% against USD since end of 2015 and it is at a 7-year low. Basically, GBP is catching up with other currencies and giving in to the strong USD. As all major currencies are weakening against the USD to increase export competitiveness and release downward pressure on asset prices, the GBP eventually followed. The strong USD finally transferred to a US stock market correction which sent a quiver to stock markets all over the world.
China's energy demand is growing at the slowest pace since late 1990s and growth in energy-intensive sectors such as steel, iron and cement collapsed. It has waved goodbye to double digit economic growth and trying to keep up 6% GDP growth a year. The Chinese Yuan got its place in the Special Drawing Rights basket, a reserve currency basket decided by the International Monetary Fund last year and they must be exhausted. The Yuan has fallen 1.3% year to date against USD, 4.1% since end of October 2015, 6% since 10 August 2015. The Yuan depreciated 2.9% in a single day on 11 August 2015. A weakening economy, a falling stock market and a falling currency in China reminds people of what happened to Russia. The BRIC countries have all lost their steam and the world economy is like a plane with an American captain with all engines stalled but 1 and running on reserve fuel. Perhaps the world economy is not crashing like in 2008 but certainly January was a hard landing. Just hope that it was a landing and not just going through turbulence.
