Financial markets reach the ‘melt-up stage’

Economic growth

SHARE THIS STORY

D'turn 18May13.pngA month ago, the blog highlighted the potentially major implications of the Bank of Japan’s (BOJ) push to devalue the yen as follows:

“However, the BOJ has a slightly different agenda. It aims to devalue the yen, not the US$. And the yen has already fallen close to $1: ¥100 compared to $1: ¥93 before the new policy was launched on 4 April. If it succeeds, then clearly US pension funds will have no further reason to buy crude oil. And so prices could easily start to reconnect with fundamentals. At the same time, the S&P 500 could continue to rise, as yen-based investors seek their own ‘store of value’.”

Today, the story is still developing as expected:

• The yen has fallen 5.6% through the $1: ¥100 level to close at $1: ¥103
• The S&P 500 has jumped 5.4% from 1582 to 1667

Of course, central banks will take this as proof that their policies are finally producing the desired recovery. But the rest of us will regard this as wishful thinking.

What we are instead witnessing is the final ‘melt-up‘ phase of the $7tn liquidity programmes. Originally, this pushed up all asset prices, but reality has since begun to set in:

• 4 years ago, most investors assumed stimulus would quickly lead to recovery
• But since then, they have gradually become wiser, if poorer
• Cotton, for example, jumped from 46c/lb to 227c/lb, but is now back at 86c/lb
• Copper jumped from $3330/t to $9880/t, but is now $7330/t
• Gold went from $880/oz to $1920/oz, but is now $1360/oz
• Brent went from $44/bbl to $123/bbl, but is now $105/bbl today

Cotton was the first to collapse as it became clear people would not suddenly be buying vast numbers of extra clothes. More recently, investors have realised copper’s boom has ended, with China’s economy now slowing fast. Whilst there is little need to buy gold as an inflation hedge, with today’s weak demand levels.

But as they retreat from these assets, the banks are still pumping out more cash. This can only go into the remaining few assets in which investors still have confidence. So these assets go even higher, temporarily, in a version of ‘last man standing‘. Thus oil may well now start to slide, as investors decide the S&P 500 index is their one and only true love.

As Gillian Tett noted in Friday’s Financial Times, today’s “bizarre conditions”, where financial markets are completely divorced from fundamentals, may last for some time. But she goes on to warn, “as those equity markets soar, investors would do well to ponder on the data dislocations. Nobody can afford to feel complacent”.

This sensible advice seems certain to be confirmed by the blog’s quarterly review of company earnings reports, to be published on Saturday. Chemicals, as the world’s 3rd largest industry, have long since ceased to feel any benefits from the liquidity programmes. Instead companies are suffering the negative impact of today’s artificially high oil prices – and may well face further pain as and when these return to more realistic levels.

The chart shows benchmark price movements since January, and latest ICIS pricing comments are below:
PTA China, red, down 11%. “Polyester makers offered price discounts in a bid to encourage sales”
Naphtha Europe, black, down 9%. “Arbitrage to the US is closed, while domestic petrochemical demand remains weak”
Brent crude oil, blue, down 8%
Benzene NWE, green, down 7%. “Values remained range-bound”
HDPE USA export, orange, up 4%. “Fresh offers were limited in the market”
S&P 500 stock market index, purple, up 14%
US$: yen, brown, up 17%

PREVIOUS POST

"A word means just what I choose it to mean"

18/05/2013

‘When I use a word,’ Humpty Dumpty said, in rather a scornful tone, ...

Learn more
NEXT POST

China's 'Ponzi loans' now 69% of GDP

21/05/2013

China’s electricity consumption (green line) is the best real-time guide t...

Learn more
More posts
No Deal Brexit still a likely option if opposition parties fail to support a new referendum
15/09/2019

Canada’s normally pro-UK ‘Globe and Mail’ summed up the prevailing external view of Brexit las...

Read
UK, EU27 and EEA businesses need to start planning for a No Deal Brexit on 31 October
28/07/2019

New UK premier, Boris Johnson, said last week that the UK must leave the EU by 31 October, “do or ...

Read
London house prices edge closer to a tumble
21/07/2019

After the excitement of Wimbledon tennis and a cricket World Cup final, Londoners were back to their...

Read
G7 births hit new record low, below Depression level in 1933
14/07/2019

If a country doesn’t have any babies, then in time it won’t have an economy. But that...

Read
From subprime to stimulus…and now social division
06/07/2019

The blog has now been running for 12 years since the first post was written from Thailand at the end...

Read
Resilience amidst headwinds is key for H2
30/06/2019

Resilience is set to become the key issue as we look forward to H2, as I note in a new analysis for ...

Read
Perennials set to defeat Fed’s attempt to maintain the stock market rally as deflation looms
23/06/2019

Never let reality get in the way of a good theory. That’s been the policy of western central b...

Read
Europe’s auto sector suffers as Dieselgate and China’s downturn hit sales
16/06/2019

Trade wars, Dieselgate and recession risk are having a major impact on the European auto industry, a...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more