The Monday Report

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Greg Peel is enjoying the final days of his holiday break.

By Rudi Filapek-Vandyck

If we don't know whether cheap oil is good for the economy, what exactly do we know?

The question was posted over the weekend under one of the stories available on the WSJ website and it summarises precisely the confusion that is currently dominating global financial markets.

Whereas most economists and commentators over here elect to focus on the extra stimulus that should be provided to global consumers from less costs to fill up the tank, in the US there's a growing awareness the oil and gas industry has been one of the engines behind the economic recovery taking place (finally) in 2014.

Worries are mounting about jobs and about capex, plus there's going to be fall-out on the financial side of things. Banks that cannot recoup loans. High yield bonds that won't be repaid. The world is facing less petro-dollars looking for an investment. Sovereign funds too will now go on a diet. The wheels of the Saudi-inspired energy meltdown are turning slowly, but they are turning nonetheless.

In Australia, and in other commodity-oriented places such as Latin-America, Canada and South-Africa, there's been a harsh realisation that oil prices have a pretty big impact on other commodities too. Either through financial participants who buy and sell large baskets in which crude oil is but one ingredient, as well as through input costs to operate mines and transport produce. Then there's the impact on overall market sentiment too.

Newspapers are filled with stories about the so-called smart money flowing into beaten down Russian equities and into sold-off energy assets worldwide, but investors in Santos, to pick but one local example, certainly won't feel like being the smartest in the class right now, given the falls in the share price to date have been swift, relentless and huge (50%+).

A cheaper oil price also distorts the outlook for official interest rates in the US and elsewhere. Is the Federal Reserve really going to raise interest rates when economists are now forecasting the official CPI might dip into negative territory (deflation!) in the first half of 2015? What does this mean for QE in Europe, and in Japan, and in China?

If you thought cheap oil is presenting financial markets with a genuine conundrum these days, try the effectiveness of QE for the eurozone and the fact that deflation over there is a real and present danger. It means Europe cannot grow its way out of the ginormous mountain of debt that is still hanging in front of it.

With China still en route to a slower pace of growth, it's probably but a matter of time before the terms "bad debts", "potential defaults" and China will be re-connected again.

It's a merry go round financial carousel we are living in and 2015 surely looks a lot like the carousel will be swinging around at elevated speed. No, we didn't really think the end of unprecedented liquidity by the world's most powerful central bankers was going to happen without consequences, both intended and unintended, or did we?

Don't underestimate the financial fall-out from the Swiss central bank shock that had investors on the defence last week. Already, smaller financial service providers went into administration (Global Brokers NZ), or had to be recapitalised (FXCM) and there's going to be more, much more. The Swiss itself are now facing economic recession.

No wonder gold is making a come-back, albeit a cautious one.

With confusion galore it's probably best investors take time to observe and to digest and to wait and see how all these conflicting ingredients are going to end up in the cocktail of desire, greed, fear and confusion that is today's equity market. On Friday, US equities rallied, but only after five consecutive down days. US equities rallied because WTI crude oil futures rallied. Friday's story really is this simple. Some commentators thought a rally was overdue given indicators were flashing "oversold, oversold". Expect a rally in local equities today too. The real question remains, of course, how sustainable is it going to be?

Difficult to say. There's increased volatility, but there's no panic. The January rout has done some damage to all kinds of technical trendlines and indicators, so that's a negative sign. An experienced market trader like Dennis Gartman now believes the dominant psychology of the US market has changed and this means more losses should be expected, regardless of the occasional rally. This is also the view of a few technical analysts I read on a regular basis. They believe current volatility may well last months, not just days or weeks, and might ultimately push US equities down a further 10% from current levels.

Not that anyone knows, really. There are too many ingredients that remain unknown today. Starting with what exactly is Mario Draghi going to announce on Thursday?

Other key focal points this week will be China's Q4 GDP on Tuesday and the HSBC flash PMI for China on Friday, with in between the BOJ meeting on Wednesday.

The International Monetary Fund (IMF) will release its views on global prospects on Tuesday and it's probably a fair assumption that a similar exercise is forthcoming as we saw last week from the World Bank (e.i. reduced growth projections).

Miners and energy companies will ramp up the release of December quarter production reports and this week's schedule includes Rio Tinto ((RIO)), BHP Billiton ((BHP)), Fortescue Metals ((FMG)) and Santos ((STO)), amongst others, on the calendar. We will also see the first batch of financial results, with GUD ((GUD)) accepting first honours on Tuesday. ResMed ((RMD)) is due on Friday.

On the macro side, we'll take notice of Westpac's consumer confidence survey (on Wednesday) and ANZ's job advertisements research (Thursday).

All this against the background of quarterly profit reports in the US who have thus far failed to inspire. Probably not on anyone's agenda is the fact special police forces in Belgium believe they have prevented "a second Paris" from happening in Brussels by killing two Islamic fundamentalists and wounding a third.

Today, US markets will remain closed in honour of Martin Luther King jr, while New Zealand is taking a day off to celebrate the Wellington anniversary.

All indications point towards a day of green on screen in Australia. Enjoy while it lasts.

For further global economic release dates and local company events please refer to the FNArena Calendar.

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