2016 Q1 Economy Shake Up

The global economy is having another shake-up over the last few months. Everyone has expected the FED to commence raising the FED rate after 7 years of a low and zero rate. The markets are pricing much ahead prior to the FED plans to raise interest rate. In December 2015, the signs for a much stable and growing global economy was there that convince the FED to raise the rates.

In a rather out of the blue situation that captures everyone surprise, China’s PBOC decided to devalue the Chinese Yuan for the second time in the year on the 11th of December 2015. This comes just five days before the almost certain FED announcement of the rates increase.

The yuan devaluation has catalysed a series of actions and reactions across the markets over the world. It also changes the perspective of how the global market will progress over the year of 2016. It has impacted every market but the commodities market especially became a leading indicator for others. The commodities market provides one of the primary indication of what will be driving or in this case not driving the economies. China’s GDP growth engines have slowed and cut back on imports of commodities across the board; oil, coal, iron, steel, etc. Firstly, the yuan devaluation also explicitly signalled higher cost for imports for overseas commodities and in turn, the Chinese domestic companies should look for domestic supply. Secondly, the lack of growth within the domestic demand is also accelerating the reduction of demand for imports of commodities. All in all, this is the first sign of a structural shift of the manufacturing economy moving towards a service economy in China.

While the China’s economy has been the reason for a thriving global economy of commodities, the growth deceleration has also shut down several of these markets. Commodities exports such as coal from Australia and South Africa are being hit. In the oil market, this has been exacerbated by the over-production of oil. In U.S.A., the new shale oil extraction has created a record production of oil and the result has caused storage facilities to be close to full utilisation. Storage tankers are also filled but are anchored just outside the docks waiting to ship to a buyer when the price is right. The oversupply of oil has resulted in a sharp drop in oil prices never seen since the 1980 oil crisis. This has also represented a lower cost of production for many industries for production and manufacturing. Transportation companies are also enjoying a lower cost of operation while hardly reducing their ticket prices.

The global economy is hit by a new change of demand and supply and is shifting the fundamentals of financial indicators. The market has changed and there are new opportunities for those who can capture these inefficiencies and new beneficiaries for those who can spot the new industry drivers. It is as such that there is an outflow of capital from the capital markets. There is a reallocation of capital and a good portion going to cash and safe havens like gold in times of crisis. However, many investors are holding the cash and waiting to find the right opportunity in terms of timing and new market trends.

The clearest indicator for market stability and growth lies very much on the stability of commodity prices. Effective government policies to drive new economies will shape the eventual demand for commodities and this will be monitored closely.