In yesterday’s world the ongoing geopolitical tensions between Saudi Arabia and Iran would have resulted in a sustained rally in oil prices. But this rally lasted barely couple of days as a result of persistently high US oil stocks and more alarming data emerging from China, such as the biggest-ever decline in rail freight movements, which occurred in 2015.

China has been responsible for half of the economic stimulus pumped into the global economy since 2008. Yes, half, and so the endless ‘will they won’t they’ debate about whether or not the Fed would raise interest rates in 2015 was largely a distraction. What people instead needed to focus on was the implications of China’s decision to withdraw stimulus, which was made way back in November 2013.

Fellow blogger Paul Hodges identifies the 2016 consequences of China’s ongoing decision to withdraw stimulus as follows:

  • We have not yet had the final ‘give-up rally’ in energy markets, which is almost inevitable after a fall of this magnitude. The reason is that consensus wisdom still believes that prices will return to previous highs. Of course they might be proved right – but the odds against must be 80% at this point.
  • This means investors have not yet realised that much of the $1.2tn invested in new energy production, and the $150bn planned in petchem investment, will never be repaid. This will be a great shock, when reality dawns.
  • Even more worrying is the $19tn that has been invested in emerging market debt over the past five years – more than the size of the US economy. How much of this will ever be repaid is anyone’s guess.
  • And then there is the rise in the world’s major interest rate benchmark – the US 10-year yield. It is almost unbelievable that this could have risen by 25% in a year, and yet investors and the media still instead obsess over the potential impact of a 0.25% rise in US short-term rates.

Hear, hear.
What else do we have to consider for 2016? Rising trade tensions, deflation – and also social unrest. My post on Friday will look in more detail on how rising trade tensions and deflation will effect the petrochemicals business

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