Commentary: Markets roar ahead, lifted by the US Federal Reserve

23 September 2013 00:00  [Source: ICB]

The surprise move – or non-move – by the US Federal Reserve to refrain from tapering its massive $85bn/month debt buying programme is a shot in the arm for the global economy and chemical sector.

It had been widely expected that Fed chairman Ben Bernanke would announce a tapering of the central bank’s quantitative easing (QE) programme. Markets had resigned themselves to such a move with US interest rates rising and currencies in emerging market countries declining in anticipation of the draining of liquidity and the start of the end of cheap money.

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The US Federal Reserve keeps the money spigot on

But the Fed’s announcement that it will keep the money spigot buoyed US stocks, with the Dow Jones Industrial Average rising 0.9%, hitting a record high of 15,677 on 18 September and interest rates on the benchmark 10-year Treasury backing off to 2.71% from around 3% just a few weeks ago.

Most chemical stocks surged higher than the overall market, with Dow Chemical (+2.9%), DuPont (+1.4%), Celanese (+3.1%), Eastman Chemical (+1.8%), Methanex (+2.6%) and PPG Industries (+1.9%) racking up solid gains. US crude oil futures also surged 2.5% on the day of the Fed announcement, underpinning chemical prices which tend to track crude oil.

In an ICIS analysis of the relationship between US petrochemical prices and crude oil and natural gas from 2000 to July 2013, we found that the correlation coefficient (r-squared) between the ICIS US Petrochemical Index (US IPEX) and West Texas Intermediate (WTI) crude oil was 85.1% – a high degree of correlation and statistically significant. In contrast, the r-squared between the US IPEX and Henry Hub natural gas prices was just 4.0% – not at all significant.

So US petrochemical producers have benefitted from high oil prices and stand to benefit further, as they sell product based on high oil prices while their costs are largely based on low-priced natural gas.

Global chemical markets may also get a short- to medium-term lift from the Fed, as confidence improves for economic prospects. Emerging market countries including Brazil, India, Turkey, Indonesia, Thailand and Malaysia were hit hard in the past month on expectations of US Fed tapering, seeing their currencies and stock markets plunge.

Already the US dollar has declined, lifting emerging market currencies, as well as their stock markets.

By: Joseph Chang
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