Tuesday, December 2, 2014

Global Economy: Top-Down View (excerpt)

Could it be that the plunge in oil prices isn’t just attributable to a supply glut? Perhaps the global economy has turned much weaker since the summer than widely recognized. The Eurozone’s recovery since the summer of 2013 has been very weak. The sanctions imposed on Russia during the summer of this year seem to have hurt lots of businesses in the Eurozone. China’s anti-corruption drive has depressed demand for luxury properties and high-end consumer goods among the country’s elite. And now the plunge in oil prices will depress spending by oil-rich countries. Let’s have a look at some of the key global economic indicators before turning to a more detailed analysis on a country-by-country basis:

(1) Industrial commodity prices. So far, the plunge in the price of a barrel of Brent hasn’t been reflected in a comparable drop in the CRB raw industrials spot price index. This index has been range-bound since the start of 2012 between 495 and 550. It is currently at the bottom of that range with a reading of 505.

(2) Copper price. On the other hand, the price of copper, which is a component of the CRB raw industrials spot price index, fell sharply last week, posting the longest string of readings below $3.00 since the summer of 2010.

(3) Emerging markets. As I noted yesterday, the Emerging Markets MSCI stock price index continues to track the range-bound CRB raw industrials spot price index. It hasn’t plunged along with oil prices or in response to the stronger dollar, so far.

(4) Global M-PMI. Yesterday, Markit reported that global manufacturing production “expanded at the slowest pace for 15 months in November, as growth of new orders hit a 16-month low and the trend in international trade volumes stagnated.” Output rose for the 25th consecutive month, but the rate of expansion was the lowest since August 2013. The press release stated that some of the weakness was attributable to “stagnation in China.”

Today's Morning Briefing: Slippery Slope. (1) Too much supply, or weakening demand? (2) Negative and positive knock-on effects. (3) Clash of the Titans in the oil patch. (4) US frackers could be more resourceful than Saudis expect. (5) From peak oil to cheap oil. (6) Yergin’s upbeat story for lower oil prices. (7) Getting more cash to drill into the ground will be challenging. (8) Other global economic indicators suggest oil plunge is a supply issue rather than a demand one. (9) Survey of global economies is a mixed bag, with US standing out. (More for subscribers.)

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