Why the falling oil price isn’t hurting markets

=> 영어

1. 동의어-반의어-유의어
- rise = boom = upward march = increased = pushing up
- fell = falling = bearish sign = dropping = slump = drifting down = weak
- slowing
- rebound
- dent: (단단한 표면을 세게 쳐서) 움푹 들어가게 만들다[찌그러뜨리다]

2. 어휘
- usher: 안내하다
- frack: 수압파쇄를 통해 셰일가스나 석유를 추출하는 기술
- rig: 굴착 장치

3. Collocation-Expression


=> 내용

Why the falling oil price isn’t hurting markets

Last time, the fear was that demand was falling. This time, it is excess supply

 

Buttonwood’s notebook      Jun 22nd 2017 | by Buttonwood

INVESTORS could easily get confused about the impact of oil-price rises on the economy and markets. The story seemed to be clear: high prices bad, low prices good. The two great oil shocks in the 1970s were unambiguously bad for Western economies—ushering in stagflation and transferring spending power to the oil-producing countries. In turn, low oil prices in the late 1990s coincided with the dotcom boom.

But when oil fell in the second half of 2015, that was seen as a bearish sign for the global economy and markets. Now oil is falling again, with both Brent crude and West Texas intermediate dropping more than 20%. But the decline has barely made a dent in the upward march of the S&P 500 index.

The key to the differing market reaction is why the oil price is falling. Back in 2015, the fear was falling demand. Investors worried in particular that the Chinese economy was slowing. If that assumption had been right, demand for much more than oil would have suffered. The equity markets did not rebound property until the spring of 2016.

This time round, the issue seems to be excess supply. OPEC, a cartel of oil-producing countries, has been attempting to cut production. But its output increased in May, thanks extra activity in Libya, Nigeria and Iraq. Meanwhile, the attempts of the Saudis to cripple America’s fracking production seem to have failed; figures from Baker Hughes show that the number of American oil rigs has increased for 22 consecutive weeks. American oil producers, which had financial problems in 2015, seem to have reorganised themselves and can cope with a lower oil price. The oil price slump in 2015 caused a sell-off in bonds issued by those American producers. This time, says Jim Reid of Deutsche Bank, the spreads (excess interest rate) on such bonds have risen to 531 basis points (bp), the widest for the year; but that compares with 1932bp in 2016.

If cheap oil is caused by excess supply, it is the equivalent of a tax cut for Western consumers; that ought to be good for equities. It also means lower headline inflation, which may explain why Treasury bond yields have been drifting down; the ten-year yield is 2.15%.

It seems like a big “but” is needed and here it comes. Any price is the balance between supply and demand and it is hard to tell which is the dominant force. Other commodity prices have also been weak; the Bloomberg commodity index is at a 12-month low. The Chinese authorities are tightening monetary policy again; the Federal Reserve is pushing up interest rates; hopes of a fiscal stimulus from President Donald Trump may have to wait until 2018. Low bond yields (and a flattening yield curve) are often seen as indicating a weaker economy. Markets could yet decide a weak oil price is a bad sign after all.

What Asia learned from its financial crisis 20 years ago

Free exchange

What Asia learned from its financial crisis 20 years ago

And is it enough to protect it from future disasters?

 Print edition | Finance and economics Jul 1st 2017

 

MUSEUM SIAM in Bangkok is dedicated to exploring all things Thai. Until July 2nd, that includes an exhibition on the Asian financial crisis, which began on that date 20 years ago, when the Thai baht lost its peg with the dollar. The exhibition features two seesaws, showing how many baht were required to balance one dollar, both before the crisis (25) and after (over 50 at one point). Visitors can also read the testimony of some of the victims, including a high-flying stockbroker who was reduced to selling sandwiches, and a businesswoman whose boss told her to “take care of the work for me” before hanging himself. (In Hong Kong, Japan and South Korea, 10,400 people killed themselves as a result of the crisis, according to subsequent research.) In Thailand the financial calamity became known as the tom yum kung crisis, after the local hot-and-sour soup, presumably because it was such a bitter and searing experience.

The exhibition’s subtitle, “Lessons (Un)learned”, seems unfair. The victims of the crisis (Thailand, South Korea, Malaysia, Indonesia and Hong Kong) took many lessons to heart. With the exception of Hong Kong, they no longer rely on a hard peg to the dollar to anchor inflation, giving their currencies more room to move. (The sandwich vendor’s chosen logo for his new business was a balloon that floats like the baht.) They borrow chiefly in their own currencies, so their liabilities no longer jump when their exchange rates fall. And where necessary, they try to neutralise heavy capital inflows with offsetting flows the other way, including central-bank purchases of foreign-exchange reserves.

The change is evident in Asia’s trade and current-account balances. On the eve of the crisis, Thailand, for example, was importing far more than it exported, borrowing from foreigners to bridge the gap. In 1996, its current-account deficit amounted to about 8% of GDP. Twenty years later, it had a surplus of over 11%.

The harder question is whether learning these lessons is enough to protect an emerging market in Asia or elsewhere from future mishaps. After all, Asia did not see the 1997 crisis coming precisely because it thought it had learned the lessons from earlier crises. Unlike the profligate Latin Americans, for example, the Asian countries had high national saving rates, limited public debt and budget surpluses. In 1996, Thailand’s central-government debt was under 5% of GDP.

So far, the lessons of 1997 have aged well. The victims of that regional crisis suffered relatively little from the global version of 2008 (although, despite South Korea’s dollar reserves, some of its corporates suffered dollar shortages). Only one of them (Indonesia, which had allowed its current-account deficit to widen) counted among the “fragile five” emerging economies, which in 2013 proved vulnerable to higher American bond yields.

But not everyone is satisfied. Hyun Song Shin of the Bank for International Settlements, emphasises one new threat, against which the lessons of 1997 would not necessarily afford protection. He argues that even countries that maintain floating exchange rates and have little visible foreign-currency debt can suffer financial strain (as in 2013), if their companies’ foreign subsidiaries borrow too much. This offshore money can relax financial conditions back home, Mr Shin argues, even if it is not necessarily repatriated. This is because companies rolling in money offshore will leave more of their onshore money in the bank. Sure enough, IMF research shows that from 2009-13 firms from middle-income countries both raised a lot of offshore debt and expanded their onshore deposits, leaving their home-country banks flush with cash.

From soup to nuts

Unfortunately, when the Federal Reserve tightens, the dollar strengthens and the offshore markets become less accommodating, this process can go into reverse. Multinationals that suddenly cannot raise money abroad make greater demands on domestic banks, withdrawing deposits and requesting loans. This tightens financial conditions, even if the local central bank, proud of its floating exchange rate and independent monetary policy, has not itself raised interest rates.

If the offshore money is never repatriated, it will not register in the official statistics as a capital inflow. Policymakers attuned to the lessons of 1997 may not pay it enough attention. They may be surprised, therefore, how little their floating currency and limited foreign debt insulate them from global financial conditions.

A different argument is that emerging economies have learned the lessons of the 1997 crisis too well. In trying to safeguard financial stability, have they sacrificed too much growth—or perhaps jeopardised stability elsewhere?

 

 

 

Before the crisis, Asia maintained extraordinary rates of capital expenditure by supplementing its own saving with saving imported from the rest of the world. After the crisis, it curbed that net foreign borrowing, but only by slashing investment (see chart).

Some of that pre-crisis investment was extravagant and wasteful. One example is Sathorn Unique in Bangkok, an eerily abandoned, incomplete block of luxury flats over 40 storeys high. It now hosts an advertising hoarding, much graffiti and the sad memory of a Swedish man who chose that spot to take his own life. But other investment has been sorely missed. Thailand’s infrastructure used to be the envy of the region. Its quality has since fallen behind Mexico’s, according to the World Economic Forum. Moreover, in a world economy that is still short of spending, too much abstemiousness begins to look anti-social. Not all countries can run current-account surpluses (which must be matched by deficits elsewhere). Therefore, not every country can fully abide by the lessons of the Asian financial crisis.

Thailand, the museum exhibition points out, used to imagine itself as the region’s “fifth tiger”. Now it is considered the “sick man of Asia”. Tom yum kung can be too spicy for some. But for a sick man, it can also be good for clearing out the sinuses.