Cheap oil cheap money

Equity markets continue to be buoyed by expectations that the ECB will announce additional monetary stimulus after the council meeting on Thursday. The IMF probably added fuel to the expectations by putting their voice to those who expect the ECB to act in 24 hours time. The IMF made these comments as they announced a cut in their global GDP estimates from 3.8% to 3.5% for 2015, a slightly more optimistic forecast than the World Bank's 3% announced last week. Both bodies acknowledged that the oil price fall has benefits to the overall economy, but despite this still see weak demand impacting growth.

Studying a long run chart of the oil price, it is interesting to note that the boom of the 1920’s was accompanied by a steady fall in the oil price. There does not appear to be an occasion in the past 100 years, when a fall in oil prices has not led to a positive run in global stock markets. There also does not appear to be a time in history when the oil price has fallen after a prolonged period of ultra loose monetary policy. It is surprising that inflation expectations remain so depressed in the face of the combination of cheap oil and cheap money.

China has been making the news again over the past few days. On Monday it was the Chinese governments turn to add their own volatility to global asset prices, after the upset caused by the move from the Swiss Central Bank at the end of last week. The Bank of China decided to restrict the leveraged trading in Chinese equities, they saw this as being partly responsible for the recent rise in Chinese share prices. On Tuesday they released the report for Q4 GDP, with so much speculation as to the state of the Chinese economy the final figure at 7.4% was slightly ahead of expectations, Chinese stocks recovered some of their previous days losses.

As we wait for the events of Thursday, Merrill Lynch, in a report released a few days ago pointed out that staggeringly over 80% of equity markets are currently supported with zero interest rate policies, and just over 50% of all global government bonds yield less than 1%. As they go on to conclude quite rightly this state of affairs continues to drive the hunt for yield. The recent bout of volatility in asset prices could well become an on going theme, as speculation increases as to what may happen to yields in the coming year. Historically periods of volatility have not been good for the overall performance of risk assets, probably as many investors leave the table unable to with stand the swings in profits. The good news is that the years ending in 5 have traditionally been good ones for equities, as has the third term of a US presidential year.

Posted on January 20, 2015 .