Judging by market psychology, the last couple of weeks prove that we live in extremely uncertain times. The international economy is locked in a pivotal make-or-break moment, with trend reversals and re-reversals betraying increasing ambiguity which, combined with the US soft patch and European debt debacle, fuel very real double-dip speculation. First, Greece’s success with the austerity deal and impressive US ISM data triggered the ‘risk on’ euphoria, pricing second round recession out of the market, trending outflows from save-haven currencies and prompting clearly bullish signals for euro/dollar and euro/swiss.
Then, Moody’s four-notch downgrade of Portugal’s debt to junk status badly wrong-footed investment bankers locked in the long-euro trade, triggering strong risk-aversion sentiment and pulling trading mobs back to the safety of the Swiss franc and Japanese yen. Resulting contagion fears quickly destroyed animated arguments favouring steady year-long euro appreciation, leaving analysts clueless about the fate of the single currency.
Then came the American non-farm payroll time-bomb. Far below the expected 100,000 new jobs expectation for June, it came at only 18,000, confirming doubts about the fed’s stimulus failure and weakening commodity currencies banking on demand revival in the world’s largest economy. Naturally, lower payrolls and increasing unemployment bode ill for commodities, but the impact on the oil market will be particularly interesting considering recent developments.
Washington and IEA have transformed market psychology by leveraging the strategic petroleum reserve, releasing 60 million barrels on top of the Saudi output hike that sounded divorce from OPEC’s quota regime. Politically correct rhetoric attributed the unexpected move to compensating for the 1.5 million bpd compromised now that nato has begun targeting Libyan oil facilities, and punishing long-Brent speculators responsible for inflating the ’08 price spiral. But the real reasons are undoubtedly Obama’s re-election campaign where energy will figure prominently and the combined American-Saudi consensus on limiting the power of OPEC price hawks, particularly Iran. Geopolitical themes and international vendettas, not economic imperatives, continue to direct the oil market despite the severity of the global downturn.
The rationale behind stimulating demand, particularly emerging Asian economies, too, seems paradoxical. Despite the SPR initiative, Chinese authorities raised interest rates and sent commodity currencies, especially the Aussie dollar, plunging. Also, it is no longer possible to guarantee avoiding a ’08 like collapse below $40. European debt problems are increasing, with Portugal set to be followed by Spain and Italy, threatening a macro Lehman-style banking crisis. On the other side of the Atlantic, American job data has seriously hurt energy bulls anticipating an improving recovery, destroying hopes of increased manufacturing, reduced unemployment and an upbeat driving season.
So, markets enter the new week wrapped in the phenomenon that scares them the most – uncertainty. The last fortnight encountered one too many black swans, an occurrence that deviates from the expected and produces market conditions extremely difficult to predict or rationalise. What can be said for certain is that efforts to contain crises in the global north, as well as assurances of employing the most suited policy-mix for revival, have proved false. Three years after the recession, despite trillions in stimulus injections, Europe is in severe crisis, America cannot get a handle on employment and China is overheating. The dollar is hurting, experts have no clue about where the euro might be in a year’s time, and an oil overhang will hurt producers. The recovery narrative, citing improved growth and employment prospects, has just changed completely.
The writer is Business Editor, Pakistan Today
