TWO FACTORS were blamed for the sharp fall of Wall Street’s three major averages last Friday—falling oil prices and the US Federal Reserve’s planned rate increase.
These factors, incidentally, were seen to contribute to another tough market next year.
Falling oil prices rekindled deflation concerns while the planned rate increase created further anxiety among US investors, who felt that it may have started to ignite a “rout” in the high-yield credit markets.
On Friday’s close, the Dow Jones Industrial Average (DJIA) was down 309.54 points or 1.74 percent at 17,265.21. The Standard & Poor’s 500 Index (S&P500) was likewise down 39.86 points or 1.94 percent at 2,012.37 and the Nasdaq Composite (Nasdaq), on the other hand, was down 111.70 points or 2.21 percent at 4,933.47.
Market observers said this was the DJIA’s “lowest close since October,” while this was the S&P500’s lowest since the middle of August and the Nasdaq’s worst in two months.
At the home front, the market’s losses were similarly substantial for the week. The drop, however, was not as steep as Wall Street’s.
The PSEi’s total losses for the week, at 186.92 points or 2.70 percent, were the result of a string of small daily losses.
What mainly influenced the market’s direction last week was attributed to two factors: The low level of business transactions and foreign investors’ overall trading activities.
Foreign investors controlled no less than 57.14 percent of the market’s total value turnover last week. Because they ended as net sellers, they drove the market down south.
The market’s daily average transaction for the week was only P5.29 billion. This was way below the market’s year-to-date daily average of P9.01 billion, which enabled the PSEi to reach new highs early in the year.
Among the market’s subsectors, services was the biggest loser. At 1,499, it was down 102.15 points or 6.38 percent on total value turnover of P4.52 billion. Holding firms came next, closing at 6,320.22. It was down 191.32 points or 2.94 percent on total value turnover of P5.15 billion.
Not far behind were the financial and industrial sectors. Financials fell to 1,506.54, a drop of 35.21 points or 2.28 percent on a much lesser total value turnover of P2.68 billion. Industrials dropped 224.36 points or 2.05 percent on a total value turnover of P7.79 billion at 10,712.29.
The property sector suffered the least last week. It fell to 2,918.99, or 1.77 points or 0.06 percent down on a total value turnover of only P5.07 billion.
Oil situation
There were two major developments last week that drove down oil prices. The first was the 168th meeting of the Organization of the Petroleum Exporting Countries (Opec), which literally stopped to operate as a cartel because its major members decided not to reduce production output in order to drive out rivals, much less, lose market share. The second was due to the advisory issued by the International Energy Agency (IEA) that the glut on supply is expected to further worsen in 2016.
Russia’s recent pronouncement that it was prepared “to sell at $40” in the next seven years and “as far out as 2022” was also another development that pulled down oil prices.
Russia was said to have been motivated to adopt this stance not only for the obvious need to prop up its economy, but as part of its latest game of strategic brinkmanship to challenge Saudi Arabia’s leadership in the oil industry along with its opposing view over the fate of Syria’s current dispensation.
The risk of a “full-blown price war” is also expected to erupt within Opec once Iran’s crude comes on stream later next year. The current rivalry between Saudi Arabia and Iran could break out into a bitter rivalry that may affect the oil market.
Of grave concern, too, is the level of global stocks. The IEA claims they are now “at nose-bleed levels” of 2,971 million barrels. And this is expected to “increase by another 300 million over the next six months” as the market continues to be flooded by the output from Opec’s major players.
Under the foregoing circumstances, it is expected that there will be a massive shift in global wealth. Accordingly, “it will have devastating implications for Opec and disaster for the North Sea producers, Brazil’s offshore projects, and heavily indebted Western producers.”
Opec revenues this year is estimated to fall to $400 billion, down from $1.2 trillion in 2012. “Saudi Arabia will be trapped by a fixed exchange peg, forcing it to bleed foreign reserves to cover a budget deficit running at 20 percent of GDP.” As such, the prospects of low oil prices may spill well beyond 2016.
On the other hand, experts also claim the “$40 and below” price regimen may fade away by the middle of 2016. This will arise from an expected increase in demand. Added to this, the IEA claims the world is not about to run out of sites to store the supplies. It estimated that about “230 million barrels of new storage is coming on stream.” Furthermore, it observes that “inventories in the US are still only at 70 percent capacity.”
Opec’s policy not to reduce production output, according to speculations, could be Saudi Arabia’s ploy to force Russia to the negotiating table. Opec is no longer big enough to act alone. The participation of a big producer, like Russia, could mean a super cartel in Opec that will control at least one half of the world’s production.
US crude last Friday had already plunged to $35.56 a barrel while Brent crude fell to $37.41.
Bottom line spin
Business establishments and motorists like you and me are enjoying the current situation of paying less for fuel. But we are told that this is not exactly good. There is a possibility that it will drive the global economy on a downward spiral.
When this happens, price volatility is expected to arise and this will likely drive the market down to a reversal.
Under the present balance of fundamentals that is holding up the world’s major economies, however, there is this possibility that next year may just simply be another tough but rewarding market for investors.
To that, accept my best wishes for the season—Merry Christmas!
(The writer is a licensed stockbroker of Eagle Equities Inc. You may reach the Market Rider at marketrider@inquirer.com.ph, densomera@msn.com or at www.kapitaltek.com)