Category: Markets

Why did the Swiss central bank introduce a negative interest rate in December 2014?

  • Wait, what? Yes, as of 22 Jan 2015 you will need to PAY an interest rate of 0.25% on balances above a certain amount.
  • This is an attempt to fight the huge upward pressure on the Swiss franc (as investors see it as a safe haven during the Russian crisis).
  • This negative interest rate makes it less attractive to hold Swiss francs investments, and hence tempers the upward pressure on the currency.
1704

What tools does Russia’s Central Bank have left to protect their currency as 18 Dec 2014?

  • FX intervention in the spot market (US$4.6bn in reserves), i.e. buy roubles from anyone who is selling.
  • Quantitative tightening, i.e. limit provision of rouble liquidity to the banking sector (opposite of Quantitative Easing).
  • Additional interest rate rises and, as a final resort, some form of exchange controls.
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Why is OPEC not cutting output to boost oil prices?

  • Because OPEC's leader, Saudi Arabia, has decided not to.
  • Saudi Arabia is now prioritising its own long-term market share over short/medium-term revenue maxmisation.
  • Oil production costs in US > those in OPEC countries, especially Saudi Arabia, so low oil price is bad for US oil (supply less likely to expand) and hence allows Saudi Arabia to maintain (or even increase) its market share.
1630

Why does Saudi Arabia seem to think that OPEC is no longer relevant?

  • Saudi has built up huge excess capacity and has a very low extraction rate, hence has the ability to go it alone despite the wishes of other major OPEC members like Iran and other oil exporters like Russia (lower oil prices limit what Saudi believes are Russia and Iran's destructive geopolitical activities in the Middle East).
  • Saudi has huge foreign exchange reserves hence a big cushion to lost oil revenues when oil price falls.
  • Saudi putting national interests (maintaining market share and staying the world's top oil producer) ahead of OPEC interests (maximising oil revenues for all members).
1628

Are the Saudis acting as if OPEC is losing relevance?

  • Yes, they seem to be.
  • In Nov 2014, faced with falling oil prices, Saudi Arabia (OPEC's leader) decided not to cut supply (atypical of OPEC's usual pricing strategy).
  • Could effectively mean that OPEC is becoming irrelevant and that the world should set oil prices, and not OPEC.
1626

Are falling oil prices bad for clean energy companies?

  • Yes. Less consumer demand for low energy products (like hybrid cars).
  • Bad for investment since urgency factor (of finding renewable energy sources) dissipates + pressure on governments for renewable energy subsidies falls.
  • Bad for share prices of clean energy companies as their power (e.g. wind and solar) looks more expensive relative to oil power.
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Why has the cost of insuring Venezuela’s debt rocketed?

  • The cost of insuring debt is measured by the Credit Default Swap (CDS) rate, which for Venezuela has rocketed in recent weeks, making its debt the most expensive in the world to insure.
  • Happened because Venezuela is one of world's major oil producers, and probably the most vulnerable to oil price falls, since oil = approx. 95% of export revenues.
  • Occuring in context of very weak economy (weakening currency, high inflation, slow growth), and thus markets expect Venezuela to default on it's debt.
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