Global financial markets are once again throwing up some warning signs, as the selloff in equities entirely erased the gains made in U.S. stock markets for 2018. The economic and financial turmoil could bleed over into a broader slowdown, which raises pitfalls for oil prices.
The risks to financial markets have multiplied this year. The latest catalyst has been turmoil in tech stocks, which once helped drive up the value of equities, but is now dragging down the broader financial system. As the New York Times notes, Apple was worth $1 trillion in October, but is now only worth about $880 billion, a rather dramatic decline in just a month. The so-called FANG stocks – Facebook, Amazon, Netflix and Alphabet (Google) – are not in a bear market.
The tech sector is getting hit on multiple fronts. A series of scandals at Facebook have heightened scrutiny and raised the odds of regulatory action. Profits for many tech companies are also not what they once were.
But the problem is not just with tech. Other corporate financials are spooking investors. Third quarter earnings from an array of top U.S. companies disappointed. Credit markets are also starting to sour. Bloomberg notes that both high-yield and investment-grade notes are set for losses this year in both euros and dollars, the first time that has occurred since 2008.
Goldman Sachs is telling investors to switch into cash, a sign that the bank is worried about the near-term future of global stocks. “Cash will represent a competitive asset class to stocks for the first time in many years,” Goldman analysts wrote in a note. Related: Why Aramco Abandoned The $40 Billion Bond Sale
With 2018 coming to a close, economists are increasingly worried that 2019 will see more economic turmoil. The Federal Reserve continues to ratchet up interest rates, which has increased the cost of borrowing, hit the housing market, and increased the trade deficit. The dollar has also strengthened significantly this year, which has battered emerging market currencies and led to volatility and capital flight.
The U.S.-China trade war also continues to rage. Over the weekend, Vice President Mike Pence and Chinese President Xi Jingping addressed the Asia-Pacific Economic Cooperation (APEC) summit, where both dug in and took hard lines on the trade dispute. The APEC summit failed to muster even a lukewarm joint statement, the first time that has occurred. China blamed the U.S. delegation. “It is mainly that individual economies insisted on imposing their own texts on other parties, excusing protectionism and unilateralism, and not accepting reasonable revisions from the Chinese and other parties,” China’s foreign ministry said.
The heightened tension has diminished hopes of a near-term resolution to the trade war. President Trump’s mercurial nature always leaves open the possibility of a surprise development, but as of now, the trade war seems set to continue. Related: Trump Thanks Saudis For Lower Oil Prices, Wants Even Cheaper Crude
That is bad news as it will only grow worse as time passes. The 10 percent U.S. tariff on $200 billion of Chinese goods jumps to 25 percent at the start of 2019. Moreover, if the highly-anticipated meeting between Trump and Xi Jingping in Buenos Aires later this month does not go well, the Trump administration could move forward on its threat to slap tariffs on an additional $260 billion of Chinese imports.
In fact, the outcome of this meeting could have global ramifications. A breakthrough in negotiations would provide a lift to global financials, but a deepening of the conflict could drag down the global economy further, already reeling from slow growth and the latest bout of volatility.
All of this is negative for oil demand, which has already been repeatedly revised down this year. The IEA sees demand growing by 1.3 million barrels per day (mb/d) in 2018 and 1.4 mb/d in 2019. Earlier this year, the agency thought demand would grow by 1.5 mb/d in 2018. “The outlook for the global economy has deteriorated since the last report,” the IEA said this month. The flip side is that lower oil prices will mitigate demand destruction. “While slower economic growth in some countries reduces the outlook for oil demand, a significant downward revision to our price assumption is supportive.”
By Nick Cunningham of Oilprice.com
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