Happy New Year to you!
As you may be aware, the decline in oil prices accelerated during the fourth quarter of 2014. The main culprit was a supply and demand imbalance. Increased production in the United States, which is currently the biggest oil producer in the world, means there is an ample supply of oil. However, slowing growth in China and other countries, along with relatively warm winter weather in the United States, has lowered demand.
Oil prices are also affected by expectations. The Organisation of Petroleum Exporting Countries’ (OPEC’s) fourth-quarter decision to maintain production levels and market share (rather than lowering production and pushing prices higher) has created an expectation that prices may remain low for some time.
Low oil prices are expected to be a boon for the world economy, consumers, and countries (like India) that are heavily dependent on oil imports. However, low prices are a detriment to countries that are heavily dependent on oil exports and could result in financial crises and geopolitical upheaval. The Economist reported analysts believe Russia needs oil to be priced at $100 a barrel to meet its 2015 budget. Venezuela, which was in financial trouble before oil prices fell, needs oil at $120 a barrel to finance its spending, and Iran needs prices even higher, at $136 a barrel.
Big trouble in Russia
Like Mentos® and fizzy drinks, a currency crisis fizzed up in Russia during the fourth quarter. The Economist said:
“In the world of central banking slow, steady, and predictable decisions are the aim. So when bankers meet in the dead of night and raise interest rates by a massive 6.5 percentage points, it suggests something is going very wrong. It is: the Russian currency crisis many feared is now a reality… and the mood in Moscow close to panic. Russians are right to worry: they are heading for a lethal combination of deep recession and runaway inflation.”
Retailers have begun re-pricing their goods daily and ruble jokes are proliferating, according to The Moscow Times. One example, “I’m investing my life savings in the Euro.” “Don’t you mean Euros?” “No, just one Euro. It’s all I can afford.”
Déjà vu Greece
The potential for a Euro crisis reared its ugly head (again). Greek markets took a decidedly pessimistic turn when the country’s government decided to hold elections. At issue are promises Alexis Tsipras, presidential candidate of the Syriza party, made about rolling back austerity measures and cancelling a portion of Greek debt. If Tsipras is elected, Greece might leave the Euro.
The FTSE 100
The relatively high degree of volatility seen in the last few months of 2014 has continued into 2015, with the FTSE 100 being down over 3% already this year. Key reasons for this fall are the continuing decline in the price of oil, further uncertainty with regard to the performance of the Russian economy, as well as fears surrounding the outcome of the upcoming Greek election.
Clearly, there are significant risks ahead for the FTSE 100 that could easily cause it to move to below 6,000 points from its current level of 6340. Were it to do so, it would be the first time this has taken place for over two years. However, there is also a major catalyst that could push it to 7,000 for the first time ever: quantitative easing (QE).
Signs of volatility in U.S. markets
Markets sparked and popped a bit in the United States during the fourth quarter. Investors, who had been unconcerned about the possibility of short-term market volatility for much of 2014, had a change of heart during October – the same month the Federal Reserve ended quantitative easing.
The Chicago Board Options Exchange’s Volatility Index (VIX), which is also known as Wall Street’s fear gauge, rose into the 20s (above its long-term historic average of 19.6) for several days. Stock markets experienced big swings, too, and then things settled back down. The VIX shot higher for a few days in December, as well. Experts say these microbursts may continue into 2015.