Saturday, 6 February 2016

Weekend Update 07/02/2016 – The Destructive Vortex.

"As fewer and fewer people have confidence in paper as a store of value, the price of gold will continue to rise. The history of fiat money is little more than a register of monetary follies and inflations. Our present age merely affords another entry in this dismal register." 

Hans F. Sennholz

If you think things are bad in the global stock markets now, just wait until China devalues, oil and commodities companies start going bust, and there’s a general realization that as America enters the new recession, that The Great Disconnect between global stock markets and economic reality won’t be solved by the central banks pushing on a string. Our central banksters have finally run out of ammo, road and talent. Welcome to the BIS world of the destructive vortex. The slow motion car crash is now picking up speed.

People sleep peaceably in their beds at night only because rough men stand ready to do violence on their behalf.

George Orwell.

Oil market spiral threatens to prick global debt bubble, warns BIS

An 'illusion of sustainability' has blinded borrowers and debtors, lulling them into a false of security. The BIS says liquidity is now drying up

The global oil industry is caught in a self-feeding downward spiral as falling prices cause producers to boost output even further in a scramble to service $3 trillion of dollar debt, the world’s top watchdog has warned.

The Bank for International Settlements fears that a perverse dynamic is at work where energy companies in Brazil, Russia, China and parts of the US shale belt are increasing production in defiance of normal market logic, leading to a bad “feedback-loop” that is sucking the whole sector into a destructive vortex.

“Lower prices have not removed excess capacity from the market, but instead may have exacerbated it. Production has been ramped up, rather than curtailed,” said Jaime Caruana, the general manager of the Swiss-based club for central bankers.

The findings raise serious questions about the strategy of Saudi Arabia and the core Opec states as they flood the global crude market to knock out rivals in a cut-throat battle for export share. The process of attrition may take far longer and do more damage than originally supposed.

Oil exporters are embracing austerity and slashing government spending, leading to a form of fiscal tightening that is slowing the global economy.

Speaking at the London School of Economics, Mr Caruana said the sheer scale of leverage in the oil and gas industry is amplifying the downturn since companies are attempting to eke out extra production to stay afloat. The risk spreads on high-yield energy bonds have jumped from 330 basis points to 1,600 over the past 18 months, amplifying the effects of the oil price crash itself.

The industry has issued $1.4 trillion of bonds and taken out a further $1.6 trillion in syndicated loans, driving up the combined energy debt threefold to $3 trillion in less than a decade.

While US shale frackers hog the limelight in the Anglo-Saxon press, many of these energy groups are giant "parastatals", such as Rosneft, Petrobras or China National Offshore Oil Corporation (CNOOC).

The BIS said state-owned oil companies increased debt at annual rate of 13pc in Russia, 25pc in Brazil and 31pc in China between 2006 and 2014, much it in the form of dollar debt through offshore subsidiaries. These oil companies do not respond to pure market pressures since they are cash cows for government budgets.

The nexus of oil and gas debt is just one part of an over-stretched financial system, increasingly exposed to the dangers of a “maturing financial cycle” and to punishing moves in the global currency markets.

Mr Caruana said an “illusion of sustainability” has blinded borrowers and debtors, lulling them into a false of security when credit was easy and asset prices were rising. This illusion can die in the blink of an eye. “The turning of the financial cycle can be quite abrupt,” he said.

The BIS calculates that debt in US dollars outside the United States has surged to $9.8 trillion, a fivefold rise since 2000 and an unprecedented level for the global monetary system as a whole.

Nasdaq slammed as rout in tech drives stocks to largest weekly drop in a month

Published: Feb 5, 2016 4:52 p.m. ET
A rout in tech stocks—highlighted by LinkedIn Corp.’s massive drop after the business-oriented social network delivered a poor outlook—helped U.S. equities post their largest weekly drop in a month.

Adding to negative sentiment was a jobs report that showed weaker-than-forecast growth in January.

Though the the rate of U.S. jobs growth in January had a silver lining in the form of strong hourly wage growth and a drop in the unemployment rate to 4.9%, the weak headline number dealt a blow to growth-oriented plays like information technology and consumer-oriented shares.

The Nasdaq Composite was particularly hard-hit by declines in the so-called FANGs—Facebook Inc. FB, -5.81% Amazon Inc. AMZN, -6.36% Google parent Alphabet Inc. GOOGL, -3.60% GOOG, -3.45%  and Netflix Inc. NFLX, -7.71% —which are all heavily weighted constituents of the index.

Nasdaq COMP, -3.25% dropped 146.41 points, or 3.3%, to close at 4,363.14. It posted a weekly drop of 5.4%, its largest in a month.

The Dow Jones Industrial Average DJIA, -1.29%  tumbled 211.61 points, or 1.3%, to 16,204.97. The blue-chips weekly drop of 1.6% was the largest in three weeks.

The S&P 500 SPX, -1.85% skidded 35.43 points, or 1.9%, to 1,880.02. Information technology shares led the index lower, followed by energy and consumer-discretionary stocks. The broad-market benchmark posted a weekly drop of 3.1%, also its largest in about a month.

A persistent decline in oil prices also weighed on stocks. The U.S. crude-oil benchmark CLH6, -2.27%  settled 2.6% lower at $30.89 a barrel, stretching its weekly loss to 8.1%.

Analysts and investors appeared to focus on the negative details of the labor report, said Jack Ablin, chief investment officer at BMO Private Bank.

The report “didn’t do anything to put people who are worried about a recession at ease,” said Mike Antonelli, equity sales trader at R.W Baird & Co.

“If your jobs numbers start slipping on top of all the industrial and manufacturing numbers, then all the pieces are coming together,” he said.

U.S. exports fall in 2015 for first time since recession

Published: Feb 5, 2016 8:41 a.m. ET
WASHINGTON (MarketWatch) — The nation’s trade deficit rose 2.7% in December as exports fell again, capping the first year since 2009 in which U.S. exports have declined.

The U.S. trade gap increased to a seasonally adjusted $43.4 billion from $42.2 billion in November, government data show. That was in line with the MarketWatch forecast.

U.S. exports dipped 0.3% to $181.5 billion. They fell 4.8% in 2015 to mark the largest decline since the final year of the Great Recession.

Exports have tumbled because of a weak global economy and a strong dollar that’s made American-supplied goods and services more expensive. The worsened trade picture contributed to slower U.S. economic growth in the second half of 2015.

Imports rose 0.3% to $224.9 billion in December. They decreased 3.1% in 2015, largely reflecting lower costs of imported oil.

For the full year, the U.S. trade deficit climbed 4.6% to $531.5 billion compared to 2014.

Europe's Economic Outlook Darkens, Sends Shudder Through Markets

February 5, 2016 — 10:16 AM GMT
Hints of investor optimism in Europe were snuffed out this week, as the darkening economic outlook registered across the continent and sent stocks and credit markets sliding.

While market turmoil at the start of this year was sparked by a selloff in commodities and Chinese stocks, the reality of Europe’s own woes hit home as companies reported dismal earnings, and policy makers and institutions lined up to cut economic forecasts and warn of further risks.

The European Commission cut its prediction for 2016 growth in the 19-nation bloc to 1.7 percent from 1.8 percent and said the largest economies of Germany, France and Italy will all perform worse than predicted just three months ago. While the European Central Bank may spur into action again, moves in the euro and stocks suggest President Mario Draghi may be losing his ability to convince investors he can anesthetize the region from risks.

“Markets had a very rough start,” said Andreas Nigg, head of equity and commodity strategy at Vontobel Asset Management in Zurich. “There’s only so much central bankers, even Draghi, can do. Each incremental dose probably has a lower impact than the previous one. The weaker-than-expected economic growth and the associated increased likelihood of a recession led to selling of risky assets.”

The blunt truth is that the euro area is still struggling to recover nearly six years after it first bailed out Greece, while European leaders are trying to tackle their latest crisis and stem the inflow of refugees.

The doom and gloom nixed a nascent stock-market recovery in Europe, with a drop of 3.6 percent in the region’s shares this week almost completely erasing the rebound from the previous two. The losses have left the Stoxx Europe 600 Index down 9.9 percent this year, its worst start since 2008. It’s trading near its lowest valuation since July relative to a gauge of global equities.

Since the start of the year, no industry group has managed to escape the carnage. Banks and automakers plunged the most, down more than 18 percent. Credit Suisse Group AG sank to its lowest price since 1992 on Thursday after posting its biggest quarterly loss in seven years. Daimler AG fell to a more than one-year low after revising down expectations for 2016 sales because of slowing demand in China.

"We need only take our heads out of the sand to see clearly that interventionism not only has failed to provide the promised something-for-nothing, but has led to all sorts of undesirable consequences. Indeed, many are just beginning to realize that we are moving towards disaster even though we have been on a wrong heading for decades." 

Leonard Read

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