Oil muddies waters as Athens reaches for the panic button
Last week, the price of oil continued to plummet but the markets did not respond well.
Several commentators, this writer included, have been left with egg on their collective faces.
There had been an expectation that good news on the energy price front would serve to prop up share prices.
Instead, the Financial Times led with the following headline on Saturday: ‘Oil price woes deepen market rout’.
With oil touching $60 (€48) a barrel, one might have expected that consumers might be feeling perked up at the prospect of falling prices at the pump, and that investment managers would be feeling positive after the release of some strong data from the US on which much of the hopes for growth rest on the short-term.
But it seems the markets have taken on board a different message: That is, that the drop in oil prices, and in commodity prices generally, is a response to a much deeper decline in global demand than has been recognised, up to now.
There are real concerns about possible defaults on sovereign debt among oil producers and about the likely exposures to commodities on the part of certain traders, leading to potential ripples through the banking and shadow banking systems.
The energy sector is an important component of the London FTSE 100, with oil and gas companies accounting for around 15% of the index.
One market strategist was reported as describing the energy sector as like a “high school jock who graduated last year, but still hangs around the practice field reliving old glories”.
All that said, it may be simply the case that fund managers are looking for excuses to sell as the year-end looms and the party thins out.
Events in Europe, meanwhile, have taken on a new complexion following news of renewed political uncertainty in Greece and what amounts to a crash in the Athens stock market.
Last Tuesday, share prices there fell by almost 13%, the biggest one-day drop on record, and this was followed by two more days of decline, producing a cumulative fall- off of around 20%.
At the same time, the yield on Greek government bonds spiked, reaching 11% on three-year money.
This has started talk about a renewed crisis in the eurozone, in the new year.
The bout of nerves in Athens was sparked by an unexpected announcement from the prime minister, Antonis Samaras (leader of the centre right New Democracy party), that he was bringing forward presidential elections to December 17. In Greece, the president, a largely ceremonial figure, is elected by the parliamentarians.
Currently, the coalition government is short of a majority in the parliament following a series of defections, and the vote on the president has effectively become a vote of confidence in the administration.
Interestingly, until October, Greece had enjoyed a long period of relative calm amid predictions that the economy might actually return to growth this year, following a collapse in output not experienced by any western economy in the post-war era.
Waiting in the wings is the left bloc, Syriza, which narrowly lost the last general election in 2012.
In the past, the idea of a Government led by Syriza and its charismatic leader, Alexis Tsipras, has tended to scare the markets, spooked by the prospect of a unilateral Greek default on its enormous national debts, which have already been written down once by its lenders.
This explains why the interest rate on Greek 10-year sovereign debt spiked by almost 2% last week, to 9.2%.
Interestingly, the yield on Irish 10-year money actually edged down by one tenth of 1% to just 1.28%.
Syriza has maintained a consistent lead in the polls of around 5%, raising the odds on a default.
However, its finance spokesman, John Milios, has mounted an Athenian version of a prawn cocktail offensive in an effort to woo the business community and to smooth ruffled feathers.
Tsipras, a former student Maoist-turned engineer, has also made soothing noises, telling financiers: “We don’t want to return to deficits. We don’t want new borrowed money.”
Not that any is likely to be be on offer.
The Syriza plan is aimed at assuring private investors that they will not be sucked into negotiations aimed at reducing the country’s huge sovereign debt load.
The idea is that some international creditors will accept a write-down of their debts as part of an effort to bring debt down to acceptable levels.
However, Greece’s northern European partners appear not to be budging from their position that the Greeks must knuckle down and pay back those debts.
It will be interesting to see whether Syriza manages to win an early election should Samaras lose his parliamentary gamble, and whether in the event of such a victory, Mr Tsipras will prove more accommodating, if not creative.
Given the tilt/lurch towards radicalism in Ireland, the actions of Leftist candidates and independents on the continent in the coming year, as they edge towards power, should be worthy of close consideration.
Closer to home, the new EU President, Jean-Claude Juncker, is coping with plenty of distractions of his own as a result of revelations concerning sweetheart deals entered into with tax-dodging mega-corporations by his own home country, Luxembourg.
Given that Mr Juncker presided over this brass plate place for a couple of decades, the existence of such practices can hardly have escaped his attention.
However, this is very much a case of brass necks as well as brass plates, with the EU president seemingly providing backing for a proposed Common Consolidated Corporation Tax, a hoary old idea which appears to be rearing its ugly head as Europe’s leaders flail around for solutions to the age-old problem of how to trap a decent share of those ever- more elusive profits of our fast-moving transnational corporations.
Europe’s larger states would love to push the Union towards a system where corporation tax charge is based on where sales are actually made, rather than one based on where the products and services supposedly originate.
Smaller states such as Ireland and the Baltic states will resist any such move.
As a plummeting Athens stock market sparks talk of a new eurozone crisis, the fall in the price of oil, instead of propping up share prices, is now being viewed as a response to a much deeper decline in global demand than had previously been recognised, writes Kyran Fitzgerald
There are real concerns about possible defaults on sovereign debt among oil producers
