FREE

One month after Macro Thoughts forecast a fall in oil prices, the market has fallen $16

And now oil suppliers are being force to take production cuts

‘Getting used to greater volatility, as economic reality hits home’ –

Macro Thoughts, October 12, 2018

 

Change means volatility and markets need to become more aware that being in consensus trades has risks.

'Severe moves in market volatility and yields may be considered as corrections within a trend, but trends in equity, oil, currency and commodity markets have largely been based on sentiment and expectations; therefore, each of these ‘corrections’ should not just be taken as a warning, but also as an indication that structural changes are already underway.  

 The IMF has lowered its global growth expectation, (but is still more optimistic than Macro Thoughts), and the International Energy Agency has cut its expectation for oil demand for 2018 and 2019 by 110,000bpd, having only three months ago forecast steady demand. For a second consecutive month, OPEC revised down its global oil demand estimate for both years, pointing at a combination of factors, which included a slower than expected Q2 performance in Latin America and the Middle East. Total Global oil demand is now expected to be 98.82mio bpd this year and 100.23mio bpd in 2019.

Commodity prices have generally struggled since Q2, and as global growth expectations continue to be adjusted lower, oil prices may surprise by starting a long, slow decline, which will be a relief to most Emerging Market economies. From the low of 2016, oil prices have recovered 38% of their pre-crisis levels, yet a $50 move up is not insignificant to consumers and corporates, and is already impacting on the growth of economies, including India’s, (where they have been forced to re-establish consumer price subsidies), and while the standard view is that higher inflation means higher interest rates, the implication for growth and unemployment should make the Fed more aware of the impact of their rate increases. 

Australian residential property has fallen for the 2^ndconsecutive quarter (with prices for houses falling for 12 consecutive months), whilst foreign buyer interest has fallen to a seven year low, and the pace of the decline is accelerating, with the steepest price falls being experienced in Melbourne and Sydney.

These are cities that experienced only limited fall out from the financial crisis, yet if the current pace continues, for Australia, this looks set to become the largest period of price decline since the early 1980s. Both cities have experienced over 4% declines during 2018, and account for 60% of Australia’s total housing wealth - and households now have twice the leverage that they had in the early 1980s.

Falling housing house prices will impact on confidence and, as a result, the next move in interest rates from the RBA may actually be a cut, as GDP growth, employment, wages and inflation would also weaken in response. Latest trade data showed August Imports were flat, and while Exports were up 1%, they were -1% in July.'

 Keith Grindlay             

 Macro Thoughts Ltd is a member of Euro IRP

 October 12, 2018 report is attached, and can also be read on