Markets are currently in a well-oiled ‘death spiral,’ according to Citigroup Inc. analysts led by Jonathan Stubbs.
‘It appears that four inter-linked phenomena are driving a negative feedback loop in the global economy and across financial markets,’ the analysts write, citing the resilient U. S. dollar, lower commodities prices, weaker trade and capital flows, and declining emerging market growth.
‘It seems reasonable to assume that another year of extreme moves in U. S. dollar (higher) and oil/commodity prices (lower) would likely continue to drive this negative feedback loop and make it very difficult for policy makers in emerging markets and developing markets to fight disinflationary forces and intercept downside risks,’ the analysts add. ‘Corporate profits and equity markets would also likely suffer further downside risk in this scenario of Oilmageddon.’
Their case is bolstered by a collection of charts showing the linkages between the four factors cited above, including the importance of lofty oil prices to the ready supply of petrodollars circulating in the world economy and flowing to financial assets. Oil exporters have enjoyed more than $6 trillion flowing into their current accounts, according to Citi’s estimates, implying some $4 trillion of capital in sovereign wealth funds (SWFs).
This post was published at David Stockmans Contra Corner on February 5, 2016.
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