More than $2.3tn was wiped off the value of global stocks last week as China’s slowing economy and currency depreciations spooked investors around the world, leading to the worst start to a year for markets in at least two decades. This is the Great Unwinding of policymaker stimulus in action.
Worse is likely to come. In recent years, investors have always assumed that central banks would rush to the rescue whenever stock markets weakened. But this is unlikely to happen today:
- The US Federal Reserve has just raised interest rates for the first time in a decade, and would lose credibility if it suddenly reversed course and implemented more stimulus
- Germany has made it clear that it does not want more stimulus from the European Central Bank, and blocked the planned move by ECB President Mario Draghi last month
- The Bank of Japan’s Board has similarly blocked moves to increase its stimulus, with members worrying about the sustainability of the current programme
- The Bank of England is very worried about the risk to the currency, due to growing concerns that the UK might leave the European Union, and so cannot add stimulus
Plus, and most crucially, 2016 is the year that President Xi has “to take the pain of restructuring the Chinese economy” before he comes up for reappointment in November 2017. It would be political suicide for him to reverse course now, after 3 years of preparation. And it would risk major social unrest in China, if people felt the country was going back to the Old Normal of increased pollution and major corruption.
This is why my 2016 Outlook for ICIS Chemical Business focuses on the potential for a painful return to reality:
“Slowly but surely, reality is returning to oil and feedstock markets. Brent crude prices are returning to their historical level of around $25/bbl and price discovery is returning to currency markets, with the dollar rising strongly against most other major currencies. Yet there is no going back to the future in terms of demand. Instead, a paradigm shift is under way in this vital area.
“For the first time in history, domestic demand growth in most countries is being driven by the needs of the lower-earning, lower-spending “New Old” 55+ generation. 1bn people are becoming “New Olders” between 2000-2030. By then, they will be more than one in five of the global population.
“In export markets, China’s New Normal economic policy has become the basis for its Five-Year Plan for 2016-2020. This sets out a clear pathway towards self-sufficiency in many value chains, meaning that the country will no longer provide a home for surplus domestic product. Consensus wisdom has thus failed us, yet again.
“But as I have long feared, it will be companies and investors who have to bear the costs of this failed analysis. The coming year is therefore likely to prove very uncomfortable”
As readers know, I am increasingly frustrated by the lack of accountability shown by most forecasters. Most seem to shift with the wind, and change their opinions in line with the consensus. This is why I also publish my complete list of forecasts at this time of year, so you can judge the record for yourself. These forecasts begin in 2008, when I was warning of a coming financial crash.
I would be delighted if you download the series, and review the analysis for yourself. I also hope you will demand to see the same collateral from your current advisers – and then ask them why their current forecasts are any more likely to be correct than in the past? Past performance cannot guarantee success in the future, but it is the best guide that we have.
WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Brent crude oil, down 67%
Naphtha Europe, down 61%. “Naphtha trade flow to Asia is limited because of a lack of longrange vessels. The vessels are instead being used for floating storage of diesel and gasoil”
Benzene Europe, down 54%. “the market subsequently cooled off in tandem with some downward movement in the US”
PTA China, down 44%. “Industry sources pointed to poor downstream demand from the polyester industry as the primary reason for weak fundamentals”
HDPE US export, down 38%. “China’s market outlook is negative mainly due to the weak Chinese economic growth and further devaluation of the yuan against the US dollar”
¥:$, down 15%
S&P 500 stock market index, down 2%