Category: Markets

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.
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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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Why is N-America expected to become a net exporter of liquid fuels?

  • Higher US output due to boom in shale oil (fracking) from areas such as Eagle Ford (Texas) and Bakken (N. Dakota).
  • Higher Canada output (natural gas + heavy crude from oil sands).
  • Outcome: North America expected to become net exporter of liquid fuels in next 10 yrs off this higher output and slower US/Canada demand (off energy efficiency improvements).
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Why is China reducing holdings of US Treasury bonds?

  • China has huge foreign currency reserves ($3.9tn) due to current account surplus (exports > imports) and over the last decade approx 30% of it has been held in US Treasury bonds.
  • China demand for US Treasury bonds keeps US interest rates low and hence helps US growth (low interest rates are good for growth).
  • Due to narrowing China current account surplus + geopolitical reasons, China's strategy is now to buy fewer US bonds and instead spend on supporting domestic demand and developing overseas markets.
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Why is there a structural move away from US$ to Chinese renminbi?

  • China demand for US Treasury bonds waning (cornerstone for global economy for > 10 yrs).
  • Strategic (redeployment of surplus China savings into capital investment around the world) and fundamental (China current account surplus shrinking).
  • Geopolitical promotion of renminbi as international currency (weaning China off US$ dependency).
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Why did the gold price rise in Dec. 2014?

  • Prompted by: Global equity sell-off + weaker USD + change in India import rules.
  • Big buying from retail investors in US + India.
  • Investors have moved to bullish (hence closing off gold shorts) + India demand after govt. ends restrictions on gold imports.
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Why did the Greece stock-market fall in Dec. 2014?

  • 09 Dec 2014 - biggest drop since 1987 global stock market crash, triggered by PM Samara's announcement of snap Presidential election.
  • Chance of radical left Syriza party coming to power, which would cause problems for Greece's place in EU monetary union.
  • Syriza want to renegotiate Greece's sovereign debt, i.e. would mean debt write-off or the euro's first exit.
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What is Abenomics?

  • Economic policy of Japan PM Shinzō Abe, introduced in his second term commencing Dec. 2012.
  • Based on "3 arrows" of [1] fiscal stimulus, [2] monetary easing and [3] structural reforms (i.e. reflation + government spending aimed to kill the 20 year recession Japan has suffered).
  • As of Dec. 2014, mixed results as worse than expected recession but strong current account (due to weaker yen, strong exports and resurgent tourism receipts).
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Why did the oil price fall in 2014?

  • Oil price fell nearly 40% between mid-June and December 2014 due to low demand and high supply.
  • Low demand: Stagnant economy in Europe, slower growth in China, flat gasoline consumption in the U.S.
  • High supply: Continued increased US production + OPEC's decision to not cut output.
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