The Great Unwinding of policymaker stimulus began last August with the collapse of oil prices and the rise of the US$. Of course, markets have bounced around since then – but that is what markets do.
And in major markets such as these, there are also people with large wallets ready to manipulate prices in one direction or another. Thus financial players have recently accumulated a near-record 265mb of oil (worth $16bn), aiming to push prices higher. But how many more barrels can they buy to store, before running out of cash?
The Great Unwinding involves more than just these two markets, however. Interest rates and stock markets will also feel the impact, as I noted when publishing the original analysis. And certainly there are growing signs that the momentum which drove prices to record levels is now waning.
The US S&P 500 Index, for example, is finding it very difficult to sustain moves above the 2100 level that it first reached back in February. And it has become increasingly volatile in recent months, just as it did from October 2007 onwards, with many more daily moves of 1% up and down.
Interest rates are showing even more signs of strain. As the chart highlights, they have been sketching out a triangle shape for the past 3 years, just as happened with oil prices. And, of course, it was the breaking of the triangle that proved a sure guide to the oil price collapse from August. The issue is simple:
- Central banks have driven interest rates to record lows in their efforts to kick-start the economy
- The US Federal Reserve now has $4tn of debt on its balance sheet, which it has to unwind at some point
- $4tn is almost 25% of the entire US economy, so it seems unlikely this can happen without problems
- The triangle shape shows that rates are no longer making new lows, and are trying to rise
The issue is the familiar one, as the phrase goes, that ‘nature hates a vacuum’. If the Fed is no longer able to control rates, because of the debt on its balance sheet, then something else is likely to take charge of them again.
It seems most likely this “something else” will be investors, worrying about how today’s level of government debt will be unwound. In the US, after all, it equals $59k/person – nearly a third higher than average annual earnings.
Investors used to believe, with the Fed, that the problem would be solved by a mix of growth and inflation. But I detect in recent meetings they are starting to share my worries instead, that “debt and deflation are a toxic combination“.
WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Benzene Europe, down 40%. “There were some positive factors supporting sentiment, but the market has so far failed to rally behind them”
Brent crude oil, down 37%
Naphtha Europe, down 36%. “Domestic petrochemical demand is suffering because of cheaper alternative feedstock propane”
PTA China, down 25%. “Current prices are still below the estimated breakeven costs level.. demand is likely to remain stable-to-firm, May being the traditional typical peak demand season..”
HDPE US export, down 18%. “US ethylene spot prices rose then fell during the week, as underlying market conditions of long supply outweighing slowly improving demand continued”
¥:$, down 18%
S&P 500 stock market index, up 8%