Germany’s Bundesbank warns on the growth outlook
on December 10, 2012

D'turn 7Dec12.pngLast week the blog looked back at the performance of its 3 benchmark products since the start of 2009. This week it looks at what has happened to its 3 financial market products:

• Before 2009, there was normally an inverse correlation between oil/naphtha prices and the US S&P 500 stock market index. Higher oil prices would normally lead to inflation, which would lead to higher interest rates and slower growth. So the S&P 500 would fall. Equally, falling oil prices would lower inflation and boost growth, causing the S&P 500 to rise
• But since 2009, as the chart shows, the position has reversed. The US Federal Reserve and other central banks have instead chosen to flood markets with liquidity, thus creating what has become known as the ‘correlation trade’, where no single market now knows what it is pricing

• Naphtha (brown) has seen the biggest rise, up 197% from $310/t to $922/t
• Brent crude oil (blue) is up 140% from $45/bbl to $109/bbl
• The S&P 500 (pink) is up 59% from 890 to 1418

Interestingly, 2 of the 3 markets show the same recent pattern as the petchem products of falling peaks and troughs, since the blog launched its Downturn Monitor. And both Brent crude oil and naphtha are now lower priced, despite the introduction of the Twist and QE3 liquidity programmes. The S&P 500 is up just 4%.

The problem, of course, is that the Fed’s policy is fundamentally flawed. Its models suggest that boosting asset prices will boost consumer confidence and ensure constant growth. It is like a doctor who decides not to talk to real patients, but instead relies on computer models to diagnose the problem. It ignores the possibility that demographics might instead drive demand.

However, across the Atlantic, at least one central bank is clearly getting worried about what might happen next. On Friday the German Bundesbank issued a surprise warning on the outlook for the economy. Its tone suggests that some policy makers are finally starting to have real doubts about the value of the policies that are being pursued:

“The cyclical outlook for the German economy has dimmed. Enterprises are cutting back their investment and hiring fewer new staff. The main drags are not only the adjustment recessions in some euro-area countries but also the slowing of the global economy… economic growth will be lower than previously assumed….. The current projection is characterised by a high degree of uncertainty. The balance of risks is on the downside. If global economic growth falls short of expectations or the debt crisis intensifies in some countries, growth will probably fall below the baseline assumption.”

The chart shows benchmark price movements since the IeC Downturn Monitor’s 29 April 2011 launch, with latest ICIS pricing comments below:
HDPE USA export, down 22%. “US material was plentiful, as producers seek to lighten their inventories”
PTA China, down 14%. “The trend in PTA futures was elusive and was said to be controlled by major financial players rather than industrial players.”
Naphtha Europe down 16%. “Market remains oversupplied and bearish and is expected to remain so for the foreseeable future.”
Brent crude oil, down 13%
Benzene NWE, up 10%. “Demand from the key styrenics sectors is seasonally weak.”
S&P 500 stock market index, up 4%

Share This Post
Leave A Reply