Greece, Iran, China – suddenly real world issues are starting to dominate the headlines. And few people now believe that printing more money is the way to solve these issues. Instead, political leaders are being forced to take the hard decisions they have ducked for so long.
Financial markets are clearly reflecting the change. They are starting to make the long journey back to being based on the fundamentals of supply and demand. Of course, there are no guarantees that the right response will be made at each critical decision-point. Or, indeed, that each decision-point will be recognised when it occurs. As my co-author John Richardson has wisely commented:
“Quite often, it could thus be a case of “one step forward and two steps back”
Phase 1 of this Great Unwinding process began nearly a year ago when oil prices began to fall, and the US$ Index to reverse a 30-year downtrend against other major currencies. As the chart above shows:
- Oil prices have fallen 45% since then, and are now resuming their fall as the recent rally ends (blue line)
- The US$ Index has risen 18%, a quite extraordinary move for the world’s reserve currency (red)
- More recently, Phase 2 of the Unwinding has seen US 10 year interest rates up nearly 0.50% since May (green)
- It also seems likely that the US S&P 500 Index peaked in May, since when it has fallen a modest 2% (black)
In years to come, money managers will wonder how they managed to become obsessed with guessing games about the behaviour of the central banks, and lose sight of developments in the real world. They will also be amazed at the willingness of many traders to blindly follow the latest trend. And they will be shocked by the way regulators allowed the interests of financial players to dominate the markets they were supposed to serve.
But that is all in the future. In the short-term, we all have to manage the challenges created by the Great Unwinding of stimulus policies. The next few weeks are likely to highlight just how difficult a journey this could become.
WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Brent crude oil, down 41%
Naphtha Europe, down 41%. “Prices fluctuated sharply through the week but ended significantly down from the previous weeks”
Benzene Europe, down 41%. “Demand was described as healthy despite some expectations of a slowdown over the summer holiday”
PTA China, down 31%. “Dropping polyester prices faced by end-users has seen low counter-bids from them, as they continue to see low demand and squeezed margins in the near term.”
HDPE US export, down 19%. “Most export spot prices held steady during the week.”
¥:$, down 20%
S&P 500 stock market index, up 6%