Financial markets are telling us something important about the outlook.
Profitable themes over the past month have been expectations of weakness in crude oil prices, in China’s economy, and in the financial sector; plus positive views on long-dated government bonds in the JUUGS (Japan, UK, US, Germany, Switzerland).
90% of market players probably dismiss most, if not all, of these trends. And they certainly would not accept there is any risk of a repeat of 2008.
The blog agrees with them on this. If there is a serious downturn, it could well be far worse than 2008:
• Oil prices at today’s levels have always led to recessions. This time, prices have been above $100/bbl for longer, and higher in Europe/China
• Debt levels are higher. US sub-prime was the 2008 focus, but since then policymakers have added $tns of debt in the US, Europe and China
• Lehman was at the eye of the storm last time. Now it is JP Morgan Chase with reportedly $150bn of trading positions in areas where they may now be the only buyer, and already $2bn of declared losses
• Political uncertainty is much higher. Nobody knows how the eurozone crisis will end; nor do we know who will rule China next year
“We are trying to avoid even mentioning 2008 – we are risking to get to that point, but there has to be actions in Europe”.
“Unless China picks up and the eurozone problems are resolved, it’s a bad market environment which won’t be resolved any time soon.”
“The market is beset by concerns over demand, credit, keenly-priced imports and weakening upstream prices. Several large creditworthy buyers have been offered spot lots that they say they cannot take, as it would mean displacing material from other sources. “‘I just don’t need 500t extra at the moment. I am working my stock down to a minimum and expect lower prices again in June’,” said one. Another said: “‘The price would have to be very low indeed for me to take extra material’.”
As the chart shows, benchmark prices have fallen further below the 29 April 2011 launch of the IeC Downturn Monitor. Latest ICIS pricing comments are below:
Naphtha Europe (brown), down 22%. “Demand remained mediocre. The Asian market is weak, while in Europe, there has been little interest from petchems and gasoline”
PTA China (red), down 18%. “Weaker downstream polyester demand exerted additional downward pressure on prices”
HDPE USA export (purple), down 17%. “Prices would have to fall to the high 40s c/lb ($1050/t) before sales volumes would pick up, traders said”
Benzene NWE (green), down 10%. “Many players were anxious about the outlook moving into June”
Brent crude oil (blue dash), down 12%
S&P 500 Index (pink), down 5%