Did I post that blog on December returns two weeks ago? Arguing that December offered the best average return and lowest risk? Well, that’s working out quite nicely, isn’t it? Eurozone stock markets are down 8% since Draghi ‘failed’ to impress investors with his extension of the ECB QE program on December 3rd.
But OPEC is also to ‘blame’ for poor performances across the board. OPEC’s decision to refrain from a production cut caused the oil price to collapse. Again! The price of crude oil fell to a 7-year low, while Brent broke the USD 40 barrier. Energy and mining companies collapsed as well dragging the overall indices with it. It seems that Mr. Draghi and OPEC killed this Santa rally. At least for now.
The intensified downtrend in oil prices brings all kinds of troubles. The graph below shows just a few losers of lower oil prices. High yield energy companies, Dubai stocks and the ruble, all victims of the slide in oil.
To make things worse, all commodities are under severe pressure. The Bloomberg Commodity Index fell to the lowest since 1999(!) this week. Oversupply, a remnant of the commodity supercycle, and slower growth in the world’s largest commodity user, China, have caused supply-demand imbalances throughout the commodity spectrum. This is increasingly taking its toll on anything related to commodities.
In some cases the commodity-related stress is exacerbated by self-inflicted wounds. The obvious example of this week being South Africa. President Zuma unexpectedly fired his finance minister, only to replace him by someone who basically nobody knows. Markets responded furiously, selling all that is South African. Bond yields shot up to levels last seen during the financial crisis and the Rand got crushed, falling 8% against the USD in a matter of days. The Rand’s reputation of a solid currency was never great, by the way.
With political issues taking over, South Africa is starting to look a bit like Brazil. And that’s not the best of comparisons since Brazil is a mess right now. A massive recession, inflation expectations that don’t look anchored, rising rates and political unrest make it very likely that Brazil will face another very difficult year.
All this before the real tightening has commenced. The last time markets dived and uncertainty about future economic developments increased the Fed did not raise rates. This time, though, the Fed looks determined to lift the target rate, something we have not seen in the last 9.5 years.
Let’s not get carried away too much. While the commodity collapse understandably causes worries, all is not lost. Lower oil prices is beneficiary for consumers and other sectors of the economy have proven resilient thus far. Concerning the Santa rally, please take note of the chart below. It shows that rally didn’t start until the second half of December, anyway.