The correlation between equities and the oil price has waned somewhat, however equity markets in Europe were boosted on Wednesday and Thursday by the news that OPEC would come to some agreement over production cuts. The oil price jumped on the news, but did not move outside its recent range of between the low and high $40’s. OPEC now provides less than half the world’s oil production, but does control the bulk of the world’s oil reserves. The benefit or otherwise to a movement in the oil price are often a source of debate. On the one hand a rising oil price should benefit oil producing economies, such as the Middle East. The flip side is the increase cost to the global consumer. Something one can probably agree on is that a rising oil price coincides eventually with a global economic recession. Our view would be that with economic growth continuing to be lack lustre and requiring the support of central banks, a spike in the oil price is more likely to harm the global economy than benefit it. Particularly if it was supply not demand driven.
Aside from the oil price banks continue to dominate the headlines, Deutsche Bank in particular. The IMF earlier in the year described Deutsche Bank as the greatest systemic risk to the global economy. Angela Merkel caused markets to wobble after she stated that German tax payers would not bail out Deutsche Bank. She may have had no alternative, to imply the government would be prepared to bail it out, the markets may get the impression they are preparing to bail it out, creating further uncertainty. Comparison continue to be drawn on web commentaries as to whether Deutsche Bank could be another Lehman in waiting. So far the credit default swaps, the price to insure the banks debt has risen, but not to the levels Lehman’s did ahead of its collapse.
The one major difference one could argue between now and 2007 is that Governments and Central Bankers will be monitoring the situation closely. Should Deutsche Bank need some form of bailout one would imagine the global financial system will prepare itself carefully to manage the situation, unlike Lehman.
Later today we get the final estimate for second quarter growth for the UK economy. On Thursday we received the final estimate for the US economy for the second quarter. The economy grew at 1.4pct, ahead of the 1.2pct expected. This completes a week where the economic data from the US economy on the whole beat market expectations. Janet Yellen speaking before the house Financial Regulations Committee remained even handed when it came to monetary policy, according to the Wall Street Journal. On the one side rises are good for the economy, on the other remains cautious and does not want to be rushed. Place your bets on December.