From week to week these days the Gulf is reminded of the global interdependence of markets, dominated currently by oil price forces and central bank liquidity stimulus.
Last week Europe’s primal struggle to engage in quantitative easing (QE) captured the attention, while energy traders were jolted too by the passing of Saudi King Abdullah. Both events would seem to have considerable consequences, although in the regional case continuity may be the paramount concern for some time.
It was interesting to note that the GCC had already quietly entered the frame in fact, though not quite as might be assumed. If you had missed that development, that refers to the German constitutional court rather than the Gulf Cooperation Council.
A recent decision by the European Court of Justice (an entity designed to promote EU integration rather than the dispassionate institution the name might suggest) appeared, by backing QE, potentially to override German sentiment against indirectly underwriting the Eurozone. The decision thereupon of the Swiss central bank to let the franc float seemed to signal the likelihood of a disruptively weak euro, creating gyrations that are rocking confidence again.
Now the Germans, governmentally and judicially, have a very serious assessment to make as to how far to backstop the Eurozone for the sake of its preservation. The sliding euro is bound to concentrate their minds, amounting as it does to a form of tacit default by the rest of Europe impinging on their purchasing power.
As discussed last week, despite its advantages to households and corporates, deflation has spooked those policymakers concerned to reflate their economies, create inflation and thereby manage their outsized debts. In their view it’s imperative to keep prices in upward motion (by QE if possible) and not allow a two-way street in which consumption and business might dip into a self-fulfilling, downward spiral.
The fact that lower oil prices already show signs of lifting real incomes and therefore expenditure among the world’s importing nations hasn’t yet registered. Financial markets are caught between Europe’s latest, very significant move, in common with Japan’s determined approach, in contrast with the curtailment of QE in the US especially, also the UK, as well as the gradual clampdown attempted by China on its overstretched shadow banking system.
Gulf markets are naturally being roiled by the huge uncertainties unleashed by this latest fracturing of policy paths. Whether another oil-based cyclical rebound can be procured locally in the near future amid the travails of the stricken blocs overseas is in doubt.
Insatiable appetite
The academic jury, though, is out on whether QE actually works in promoting inflation and growth (even for an interim, let alone reliably over time), and scepticism is becoming an underlying fact to market sentiment, alongside an insatiable appetite for yet more freshly-minted (printed) money.
While QE in the US at least didn’t seem to impede economic rebound — and might have helped, notwithstanding its unfortunately skewed distributional effects — in Japan the fear is that not only will inflation refuse to reach its intended 2 per cent target, but that monstrous distortion of the government bond market (cornered by the central bank) might be reaching its limits, damaging the country’s economic strategy and prospective financial health.
That danger may itself impact world markets soon enough. For the moment Europe’s return to the spotlight has added another shocking twist to proceedings, threatening the uneasy peace and unspoken contradictions at the heart of the EU and the viability of the euro. There is an air of desperation, previous strategy having failed, with the creditor countries of the north, and doubtless particularly their voters, increasingly at odds with the debtors of the south.
In this regard, Greece’s pending general election (this weekend) and aftermath promises a pivotal moment and another fateful period ahead. Critical choices will have to be made about the future of the Eurozone. Global markets are right to be nervous, and volatility is bound to feature.
Gulf bourses may hope for sufficient confidence to return that oil will pick up smartly. As to the likely lead given by benchmarks, government bonds may do well not because QE works but because it doesn’t (i.e. economies remain in disinflationary slump anyway) and a safe haven is needed. If the idea that Eurozone countries cannot fail to pay their way is revisited, however, even that’s not a safe assumption. Stocks everywhere may yo-yo between policy despair on the one hand and the comfort of the incessant official urge to provide a (monetary) surge on the other.
Oil is liable to stay soft until the sense of crisis passes, subject to what happens meanwhile to shale production and any surprise change of tack in Opec policy. Gold, though, could well be rekindled now — unblemished by government largesse, and even offering a better yield, at zero, than the negative rates arising on medium-term sovereign bonds in Europe!
