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Oilmanac

Summary

Often at the start of a year an almanac is published listing the key dates of the forthcoming year. It may also contain some predictions. Now that the long list of prognostications of what’s going to happen in 2015 and what happened at the end of last year that inundated your inbox have begun to abate, we thought it worth focusing on some market and/or media misinterpretations that have occurred.

Often at the start of a year an almanac is published listing the key dates of the forthcoming year. It may also contain some predictions. Now that the long list of prognostications of what’s going to happen in 2015 and what happened at the end of last year that inundated your inbox have begun to abate, we thought it worth focusing on some market and/or media misinterpretations that have occurred.
The key event for financial markets in recent weeks has been the collapse in oil prices. The Brent oil price has plummeted from over $100 per barrel to below $50 at the time of writing and has polarised the winners and losers or in other words, the consumers win, the producers lose.
Stock markets around the world have oscillated as a consequence with volatility rising. The resulting deflationary impact of falling oil has unnerved investors; apparently as global equity markets start the year in negative territory. As we pointed out in our blog on deflation published on November 27th last year, ‘Deflation – The Good, The Bad & The Ugly’, falling oil prices, whilst bad for oil producing countries and related companies, are universally good for consumers via the transmission of increases in disposable income as less money is spent on filling up cars which require less ‘gas’. The link below takes you to a quick slideshow on how the supply and demand for oil has changed in the US.
www.bloomberg.com/graphics/2014-america-shakes-off-oil-addiction/
If oil prices were to fall just a few dollars more which is feasible given the demand/supply imbalance, the impact on GDP by country would be quite interesting and for most, stimulative.
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The deflation headlines surrounding last week’s Eurozone inflation data somewhat missed the point that ex-energy, Eurozone inflation was positive 0.7%, below the 2% target but much closer to it than the headline minus 0.2%. Nevertheless there is a disinflationary trend within developed economies at present as was underlined in the first employment report from the US last Friday which showed that while unemployment continues to fall, it does so without any wage inflation pressure as average hourly earnings fell 0.2% to 1.7% annualised. The main growth in jobs is in low-paid, low-skilled jobs. The underemployment rate, U6, which we have focused on here in the past also showed some improvement but from a stubbornly high level; 11.2% from 11.4% annualised. So, in short, moderate wage growth in the US has had little effect on disposable income, the kicker has come from much lower oil prices. As in the UK, lower inflation leads to a pick-up in real wages.
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One impact that interests me as an active manager is that energy company equities and high yield debt prices have suffered. Passive managers have, by default (debt investors excuse the pun), been exposed to these losses. You could say that the frackers have hurt the trackers. Good active conviction managers like those in the T. Bailey funds have generally had little to no energy exposure and consequently avoided much of the negative price movements therein.
But back to the almanac to conclude. Key dates ahead will be the expected quantitative easing (QE) announcement by the European Central Bank (ECB) on Jan 22nd quickly followed on January 25th by the Greek election where the anti-austerity party Syriza, is expected to win the most votes. Consequently there is talk of a ‘Grexit’ from the Euro for the Greeks. A word of caution though. Syriza will need coalition partners to form a government and an expulsion from the Euro will not achieve anything other than – austerity. It pays both the Greeks and the Germans to negotiate, whatever else is being said. Anyway, we’ll shortly find out.
The subject of QE requires some thought and more than it’s being given in the financial press. Bond yields across the Eurozone are already very low outside Greece so the issue is can any proceeds from purchasing sovereign and/or investment grade corporate debt find its way to those who wish to borrow; no easy achievement as the UK found. There will likely be some QE as the ECB has been testing the waters apparently with how to buy Euro500 billion of investment grade debt. Lastly, although you’d never know it from the press, European economic data is bottoming out and should improve in the first half of 2015.
Further out in May this year, we have the UK General Election – a forecaster’s dream? No predictions here though.
Let me take the opportunity afforded by our first blog of the year to apologise for its uncharacteristic length, it won’t happen again, but also to wish you a happy and prosperous 2015.

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