The relief rally post the China data, did not last long and markets hit a very large speed bump on Wednesday, as the oil price and global markets remain intertwined.
Weakening manufacturing data, falling purchasing manager’s surveys, inventories rising, weaker inflation, widening credit spreads, and mixed company results are all contributing to fears that the world is heading for a recession that will severely impact asset prices, and more importantly central bankers are unable to affect it.
On Wednesday William White, former Bank of International Settlements Chief economist, apparently credited with one of the few that foresaw the 2008 crisis, added fuel to an already rampant fire by suggesting that the world is heading for a series of bankruptcies that will test the social structure. He is another who believes central bankers have effectively run out of bullets.
The International Energy Agency stated on Wednesday that “the world is swimming in oil” adding further gloom surrounding the commodity. Whether markets are getting too hung up on the impact of low oil prices, time will tell. Recent and past history suggests that forecasters are poor in forecasting the oil price; no forecasters saw the current move 18 months ago. With echoes of today, oil prices fell to 13 dollars a barrel in 1999, and many “experts” were convinced that this would be the new normal. The Economist ran a front page article on the benefits and problems caused by a very low oil price, within a year of that article the oil price had risen to over $30 a barrel. No one will suggest the oil price will treble in 12 months from now, and we would not promote the thought, but 1999 again highlights how unpredictable the oil price can be.
As we woke on Thursday, newspapers were full of the previous days falls, bad news was everywhere, queue the rally aided again by a central banker. Mario Draghi, speaking at the monthly post rate-setting meeting suggested he might have a few bullets left as he hinted at the possibility of further stimulus from the ECB in March, as the falling oil price will reduce inflation expectations. This move may offer the possibility that the Fed will be able to use the continued weakness as an excuse not to move further on rates in the coming months.
One slight anomaly as many equity markets are back to testing the lows of August. At that time the Vix index traded close to 40, today it trades close to 25. If you accept the Vix is an indication of financial stress, for example it hit the 80’s during 2008. This current reading suggests either investors remain complacent and not enough fear has entered the markets yet. On the other hand, it may suggest that risk assets are over reacting to global recession fears.