Financial and economic market developments

A notable development these last few weeks has been the change of forward guidance coming from the Federal reserve. The Fed has gradually turned away from indicating that they will have 4 instances of rate hikes. This “dovish” talk has caused the dollar to lose value (relative to global currencies), which means capital may flow into the US and equities can only hope for better performance in coming quarters. First quarter earnings results have been terrible for corporate US.

I’ve been following the negative developments in Venezuela and the following has happened :-

1.     The country is facing runaway inflation, Zimbabwe-style.

Inflation has forced the government to use up its now dwindling cash reserves. Unofficial data indicates an annualised inflation rate of 397.4%

The government will no longer be able to afford printing money yet the President still denies inflation.

Mr. Maduro recently imposed a 2-day work-week for public servants in Venezuela arguing that keeping them home would save energy.

2.     In the face of the low oil prices, the economy is expected to shrink by 8% this year.

3.     There’s a real negative turn that seems to be only getting worse by the days.

Searching Venezuela news on Google right now (09/05/26) will bring up news of a people working to oust Maduro in a referendum petition. A story that is currently fresh on Reddit will appear that the leader of a regional opposition party leader has only just been assassinated. It gets very grim very quickly down the search results but we can only hope for the best for the people of Venezuela.

In a tide of social unrest that’s getting underway, people are getting desperate for basic necessities like food and medicine.

I expound on a few global risk items and concerns to watch for in the coming quarters as highlighted initially by Preston of The Investors Podcast :-

1.     The impact of negative rates for banks in Europe (Particularly Deutsche Bank)

As I’ve written previously, negative rates are still quite a ‘new’ phenomenon and their effects on the financial markets is one that we have to continually keep watch on. How long will banks in Europe sustain having to pay central banks to hold their excess reserves? How much new lending are banks actually doing? How long will banks accept eroded profits? How much longer will inflation remain low in Europe? Answers to these questions are still developing and so we wait.

2.     A strong Yen pushing Japanese stock prices lower

Japanese stocks and exports that depend on a weak yen are being hammered. The recent major earthquakes in Japan have necessitated a postponement of the tax hike that's expected to be coming Japan's way as well as a delayed early election possibility. 

3.     Chinese Commodity prices returning to reality (because the PBOC pushed commodity prices into outer space during the first quarter)

Action by the PBOC to pump credit into the Chinese economy is a definite watch. The image below courtesy of Stan Druckenmiller through Zero Hedge tells very many stories. A fact for the day from Stan on China would be, “since 2012 the Chinese banking sector has allowed credit to grow by the amount of the entire Brazilian GDP per year!”

4.     Potential impacts of the Saudi currency de-pegging from the US dollar due to the speed and impact of their domestic reserves being spent.  Could cause the dollar to strengthen and put more pressure on US Stocks.

Given that Saudi’s 80% revenue is oil-dependent, prolonged low prices in oil may break Saudi’s peg to the USD some way or another. Although still quite an unlikely event given their still ‘deep’ reserve pockets, markets are pricing a riyal devaluation very highly at the moment, as the Bloomberg currency forward image showed (December 2015). If the Saudi riyal is de-pegged or loosened, the impacts to the global economy would certainly be catastrophic given their position as the biggest OPEC member. The reason Saudi Arabia may want to think about de-pegging would be to prop up revenue as a devalued Riyal would be a great welcome boost. The Saudi oil minister Ali al-Naimi was ousted on Saturday 07/05/16. Mr Naimi had led calls to help re-balance the struggling oil market so his removal may indicate a slower price recovery.

5.     Watch the 2^nd quarters US earnings trends.  If earnings continue to slip into the second quarter, things could get ugly for US Stocks.

As Preston, of Investors Podcast noted, US reporting data from quarter 1 was terrible. Fundamentally, growth continues to slow in the US, corporate profit margins continue to decrease and international markets continue to struggle (particularly the Bank of Japan, the PBOC, and European Banks).  Although the market could even run higher, the upside to downside risk/reward continues to be asymmetrical.

6.     Brexit: This could be a big concern for trade and US stocks.

Instability due to an exit of Britain from the EU would be a real concern. The June 23^rd referendum is one that all eyes are eagerly going to be watching soon.

7.     High yield debt.  The oil industry supposedly has 3 trillion or more in debt with as much as 50% being estimated as junk.  Some really interesting things could happen here if global demand continues to slip in energy and prices start heading lower again.  I think this is a major concern moving forward, but there is no way of knowing if this trend will return for sure. 

Some expect that this trend will continue but it could go the other way as well. Oil prices are showing some signs of recovering but Iran's recent stint to crank up production may compel Russia and the Saudis to ramp up production as well. These actions would go some way to reverse the current upward trend.

Reference links provided within the post in grey.