Many people in financial markets were hoping a new QE4 stimulus programme would be announced at the recent IMF meeting in Peru. Unsurprisingly, markets rallied in anticipation:
- Brent oil was at $44/bbl on 24 August, and rallied to $56/bbl within a week
- The US S&P 500 Index rallied from 1823 to 1979 over the same period as the rumour spread
We have seen such rallies before, and we will no doubt see them again. They confirm how difficult it is going to be for markets to return to valuations based on the fundamentals of supply and demand. It is so much easier to base your investment strategies on stimulus programmes. These create a looking-glass world where bad news on the economy is always good news for financial markets, as it means they will more free cash with which to push prices higher. And the only strategy one needs to know is to “buy on the dips”.
However, there has been little follow-through on these rallies, and the hoped-for stimulus has not (yet) appeared. As a result, investors are having some nervous moments. In oil markets, for example, inventories have continued to increase; China’s economic growth has slowed further; oil supply has proved resilient and Iran’s return to oil markets has come closer. Thus Brent prices have already slipped below $49/bbl.
Importantly also, leading figures in oil markets have suggested that hopes of a substantial rally are illusional. As Reuters reported yesterday:
“Vitol, the world’s largest oil trader, believes the crude price will struggle to trade above $60/bbl next year, as the effects of slowing global demand growth could be compounded by a return of Iranian and maybe even Libyan barrels.
“The price of oil has halved over the last 12 months, mainly as a result of unprecedented levels of production from some major exporting countries, but also as demand from China and other commodity consumers, such as Brazil and Russia, slackened. Ian Taylor, Vitol CEO, said his company forecast 2016 global oil demand growth at around 1.35 mbpd, slowing from this year’s strong expected growth of 1.7 mbpd”
Even this view may prove optimistic in my view. China’s President Xi has every incentive to ‘take the pain’ of an economic slowdown by the end of 2016. He must surely want to be able to argue that the worst is over, and better times lie ahead. when he comes up for reappointment in November 2017.
This has major implications for company Budgets next year, as I discuss in a new analysis for ICIS Chemical Business. Xi’s New Normal policies also raise the question of whether we are now seeing a generational change in demand patterns, as I will discuss next Monday in my 2016 – 2018 Budget Outlook.
Please click here to download the ICIS article.