Here it is – evidence that surging crude oil prices in the face of Libyan supply worries is too much for the global economy to handle:
Copper Futures, daily: who pulled the plug? Surging crude oil apparently is now a threat to global recovery. Not too surprising as the $100 per barrel threshold has been the pre-determined psychological tipping point for a while now. The move in crude higher has corresponded with a test of Copper’s 50-day moving average (orange line).
Now, either we’ve been right all this time when we’ve appeared so wrong, and the economy (as evidenced by copper price action) actually is as sensitive to a recessionary relapse as we expected; or the reporters and analysts are doing the usual and pumping up a story that tugs at the emotions of investors, readers and truck drivers across the globe. Ahhhhhhh – we can’t handle rising crude prices!
What happened to all the recovery confidence? Shot out the window just like that? A couple months ago and I would have said “Yep, probably.” But today I’m not so quick to write-off the recovery potential ingrained in current global market perceptions. Let’s run through a few things that touch on both sides (in no particular order):
1) Geopolitical rally. The recent spike, in both Brent and WTI crude oil prices, is due to the geopolitical troubles in the Middle East, most notably the very real threat of supply disruptions from a disrupted Libyan state. One of the ideas I was poking at when I discussed this subject on Monday was whether there was real supply/demand drivers in play to support the geo-political-led rally. I am leaning towards no. And now the news is littered with reports that Saudi Arabia will come in and fill the supply void if Libya really crosses the line into chaos.
2) US consumer. The holidays could not have come at a better time for US retailers and proponents of global economic recovery. The holidays gave US consumers (among others) reason to go out and spend money … regardless of whether things may still be a little tight on their personal balance sheets. But the fact is, US consumers are still in saving mode (even though the obvious trend towards deleveraging seems to have taken a breather.) I heard yesterday in an interview with Gary Shilling that 46% of the over $800 billion of stimulus money in the US has been saved. Of course I don’t know the assumptions or definitions being accepted in this determination, but Mr. Shilling believes that a current savings rate of around 5.5% will still push to double-digits before the trend towards savings changes course. The point is: measures of US growth could be hurt if consumers lose their buying flexibility at the hand of rising crude oil and pump prices.
3) Improved risk-consciousness. Since the 2008 global financial collapse, and the subsequent immersion of the Black Swan theory, the overall tone among analysts and reporters has been one of constant caution … even while so many risk assets and markets have risen so steadily that they’ve delved into complacency. In much the same way that investors seem pacified whenever global officials announce mediocre or irrelevant policy measures aimed at a global “fix”, so too are investors comforted by the fact that analysts and reporters are on the ball … ready to uncover any risks to markets and economies before they even become real risks. With so much diligent work being done to prevent a 2008 flashback, what’s to worry about when you’re deciding on where to park your spec money?
4) Timing. In recent months we’ve tossed around the idea of a commodities bubble based on potential outcomes in emerging markets and China where they are battling overheating economies and hot money flows. But frankly, the stabilization of global recovery expectations and the current tightness in supply of many major commodities has provided solid ground for rising prices. And that should continue … at least for a little while. Some prices that have shot up sharply in recent weeks and months have pulled back and let off some steam – this is a good thing if you’re a commodity bull, as it keeps prices from truly reaching bubble territory and bringing on the consequences (seen and unseen) that come with it. For now, at current prices, fundamentals are still supportive of commodities prices as long as the outlook for global growth has not changed dramatically.
To summarize: we could see the crude oil price spike fizzle rather quickly since supply tightness was not a severe concern prior to the Mid-East unrest and Saudi Arabia has promise a helpful hand; the fact that the US consumer is still against the ropes may mean crude oil does impact growth levels; transparency seems to be a reassuring feature of the financial market atmosphere these days and should ultimately be supportive until statistical evidence show risks are biting down on growth; global demand and supply fundamentals remain supportive for commodities at current prices.
It doesn’t appear yet that crude oil prices can derail what the market has come to expect out of global growth.
Could $100 per barrel be the breaking point? Sure. But we’re going to need to see prices stay high for an extended period of time (say 2-3 months.) If we don’t, and I don’t think we will, then I assume commodities and stock markets could resume their uptrends.
Currencies, however, seem to be operating in their own world. We noted that even in the face of rising risk this week, yield expectations were still driving the dollar, euro and pound relative to each other. Unless we see a real strong move into risk aversion, which we still expect would bring money into dollars, it is likely these three (and perhaps the yen included) continue to battle it out on their own time. Commodity currencies will likely re-correlate themselves to the risk appetite/global growth camp and be supported by a fresh move higher in commodity prices and a reassurance that global growth is not facing any substantial or immediate risks.