Archive for December, 2011
Last month this blog observed that falling inflation by way of lower commodity prices might constitute a rare silver lining to the current crisis.
Since that time, the S&P GSCI index has fallen by a further 5%. Looking at individual commodities, precious metals have been bottom of the class, with gold, silver and platinum all down around 8-10%. Industrial metals did rather better, with copper losing only 3% over the same period. The major soft commodities turned in a mixed performance, with wheat continuing to drift lower (down 3%), rice falling a little more sharply (-6%) and cotton shedding 8% since a month ago. Oil, by far the most significant commodity by traded value and index impact, performed roughly in line with the overall index as one would expect.
This ought to be almost unequivocally good news. As the Chancellor noted in his autumn statement for example, rising prices pushed the UK household sector into recession again in the second half of 2010. Falling inflation, by taking less of a bite out of household incomes, should be a positive for the economy.
On a similar note, lower inflation can mean support for growth via looser monetary policy: in China, for instance, where the reserve requirement for banks was cut two weeks ago for the first time since 2008.
Of course, commodity producers tend not to be so happy with falling prices, which is why their effects cannot be said to be universally benign. And this week’s decision by OPEC to reunite behind an oil production target is an unhappy reminder that this is especially true during a time of civic unrest in the Arab world. From the Wall Street Journal:
A move by members of the Organization of Petroleum-Exporting Countries to put aside major differences means the group may now be able to defend high oil prices by cutting production if needed …
Oil producers on Wednesday closed ranks to defend the high oil price they need to balance their budgets and quell the risk of social unrest. OPEC members, meeting in Vienna, agreed to keep a lid on production at its current level of broadly 30 million barrels a day …
OPEC can afford falling prices less than at any time in its 51-year history. Both Saudi Arabia and Iran have boosted their social spending throughout this year to avoid the kind of unrest seen in Egypt or Yemen. OPEC said in a recent report that many of its members now need oil to be above $85 a barrel to balance their budgets.
Without wishing to outdo the rampaging bear consensus – which this week seized on a single Chinese data point as evidence of an impending east Asian recession – revolution in key Gulf states would most likely turn out not to be a price worth paying for cheaper oil.
As we approach the end of a difficult year it is a reminder of the risks the world still faces that even the silver lining of the ongoing crisis turns out to have another cloud attached.
“Marathon runners often say that a marathon gets especially tough and strenuous after about 35 kilometers,” Merkel told lower-house lawmakers in Berlin today … “But they also say you can last the whole course if you’re aware of the magnitude of the task from the start.”
Nowhere has her analogy proved more apt than in the country which originated the concept: Greece. And while it received negligible attention, the Greeks this week reached another milestone on their long slog towards recovery.
Amid significant popular dissatisfaction, which on Wednesday saw the seventh general strike of the year, the leader of Greece’s main opposition party gave a written commitment to the EU Commission, the Eurogroup, the ECB and the IMF that he would support the budgetary measures sought by caretaker prime minister Papademos. As a result, release of the EU component of the nation’s bailout money – thrown into jeopardy by former PM Papandreou’s referendum call – was agreed on Tuesday night. The IMF is due to approve its €2.2bn share of the €8bn aid tranche by Monday. By January, details of the debt swap with private sector creditors are due to be agreed. The exchange is projected to practically halve Greece’s deficit to 5.4% for 2012.
This amounts to quite a lot of news, but of course the Greeks aren’t the only ones who have been moving on. The bear consensus has moved on too. Concerns over Greece have in the market’s mind long been superseded. The solvency of Italy and Spain has been challenged, as well as that of France. Incredibly, there were even confused reports of a “failed” bund issue in Germany too.
Since then, coordinated action by central banks on Wednesday to improve liquidity in the European banking system has calmed nerves and sent stock markets soaring. And only yesterday, successful bond auctions in France and Spain did the same for government debt. Eurozone bond yields have fallen back substantially over the last couple of days (including, crucially, in Italy.)
Europe’s marathon is far from complete. A disappointing EU summit next week, or any number of left field events could plunge us all back into funk and gloom once again. But it is worth reminding ourselves that despite the pitch of fear and associated confidence effects, disaster has yet to strike. And it is just about possible that while the consensus worries about other things (and indeed everything), an exchange of Greek debt is successfully agreed, Greece and the other bailout countries make further progress towards solvency, other eurozone nations go on happily funding themselves with no outside assistance and the global recovery struggles resolutely on.
Like a marathon, this “muddle-through” scenario could prove protracted and painful. But there’s one thing it still doesn’t appear to be, even after the positive market moves this week: priced in.