The World Bank has cut its forecast for crude oil prices for 2016 by $14 a barrel to $37, and also reduced its predictions for 37 out of 46 commodities. Phillip Inman reports:
The World Bank has slashed its forecast for oil prices this year, saying the cost of a barrel of crude will stay near its current lows for the rest of 2016.
The Washington-based institution said a glut of oil that sent prices crashing by almost half last year and another 27% this month will continue to dominate the market for the next year.
It added that warm winter weather in Europe and weaker than expected growth in China and other emerging economies will depress demand and keep the average price at $37 a barrel, down from a projection of $51 last October.
“Low prices for oil and commodities are likely to be with us for some time,” said John Baffes, senior economist and lead author of the bank’s commodities markets outlook. “While we see some prospect for commodity prices to rise slightly over the next two years, significant downside risks remain.”
Brent crude is currently up 1.1% at $30.85 a barrel.
Here is our full story:
US services sector slows
More weak data for the US Federal Reserve to consider as it gathers for its first meeting since raising interest rates in December, a move many believe may have been a mistake.
The US services sector has seen its slowest growth since December 2014. The Markit initial reading for the purchasing managers business activity index came in at 53.7 in January. This is down from 54.3 the previous month and just below the expected 53.9. Markit said:
U.S. service providers started the year with another slowdown in business activity growth…Although still indicative of a solid increase in business activity, the headline index has now signalled weaker overall growth in four of the past five months.
Chris Williamson, chief economist at Markit said a drop in business confidence suggested things could get worse:
The survey data paint an inauspicious start to the year for the US economy.
A struggling manufacturing economy is being accompanied by a services sector where growth showed further signs of losing momentum in January even before the bad weather hit.
The data are by no means disastrous, signalling a 1.5% annualised rate of economic growth at the start of the year, but the drop in business confidence to one of its lowest levels for over five years suggests that firms are bracing themselves for worse to come. Worries about financial market volatility, the impact of slower growth overseas, a downturn in the energy sector and uncertainty about higher interest rates all took their toll and set the scene for further weakness in coming months.
Wall Street opens higher
On what has been a volatile day for markets so far, Wall Street has started off on the front foot ahead of results from Apple and as the Federal Reserve begins its latest two day meeting.
With oil recovering from its early falls – Brent crude is now up 1.6% at $30.99 a barrel having fallen as low as $29.27 – the Dow Jones Industrial Average is up 133 points or 0.8% in early trading.
In Europe the FTSE 100 is 0.15% higher while Germany’s Dax, France’s Cac and Spain’s Ibex have edged into positive territory despite the earlier 6% slump on the Chinese market.
Britain’s economy continues to grow pretty steadily, according to the Bank of England’s chief economist Andy Haldane, and a Chinese slowdown is unlikely to push the world economy into negative growth.
We would have to fall a long way, or something very untoward would have to happen for that to fall into negative territory,.
I think that is a reasonably unlikely event. Now are there things that could happen that could slow that rate of growth? Yes there are. It’s true to say there are some concerns about how rapidly the Chinese economy is growing.
These days China is of such a size and it’s sufficiently well integrated into the world economy that when it sneezes there is a sense at which the world economy is at risk of catching a cold.
Does that mean there is a chance that world growth could slow from current levels? Yes, there is a chance of that.
Do I think there is a big risk of us being tipped into negative growth in the world economy? That strikes me as quite unlikely as things sit today.
Meanwhile, as Carney was speaking, the World Economic Forum has announced the Bank of England governor as one of eight “senior decision makers” joining a taskforce to discuss the future of the global financial system.
The group was formed at the request of Carney and WEF founder professor Klaus Schwab and it will “work to identify, analyse and propose recommendations in response to major transformative forces influencing the future of global finance and economics.”
A recent WEF document identified five areas which the taskforce could discuss in its first meeting: emerging markets, technologyi, regulatory and monetary policies, loss of trust in financial services and financial inclusion.
Apart from Carney the other members of the taskforce are Citgroup chief executive Michael Corbat; Blackrock chairman Laurence Fink; HSBC chairman Douglas Flint; Bank of America chairman Brian Moynihan; Raghuram Rajan, governor of the Reserve Bank of India; Min Zhu, deputy managing director of the IMF; and Liu Mingkang, economics and finance fellow at the Chinese University of Hong Kong.
The current account is significant, as it shows the balance between the goods, services and financial transactions into, and out of, the UK. Britain has been running a persistent deficit for some time — dubbed the ‘invisible deficit’, as the financial markets have been relaxed about it.
But historically, countries with large current account deficits have often been hit with currency crises, as investors eventually lose faith and stop buying your assets. That’s what Mark Carney means when he mentions the “kindness of strangers”.
A currency depreciation can actually help fix a current account deficit, as it makes imports unpleasantly expensive while helping exporters compete.
But as our economics editor Larry Elliot has argued, Britain doesn’t have the manufacturing base to really profit from a Sterling crisis.
So if international investors decide not to buy UK assets, or hold the pound, if Britain’s EU membership is in doubt, there could be a problem…..
Mark Carney on Brexit, oil, and his own future
A quick recap of the main points from the Governor of the Bank of England’s appearance at parliament:
1) Mark Carney warned that Britain’s current account deficit is still a risk to financial stability, due to the current market instability and the looming referendum on EU membership.
He warned that:
First, the general global environment has been much volatile.
Relying on the kindness of strangers is not optimal in that type of environment, and that’s what is the case when you’re running a 4%, 4.5% current account deficit.
And secondly, the possibility of a risk premium being attached to UK assets because of certain developments exists. And that plays into the riskiness of the situation.
Carney also agreed that “material decisions” can have an impact on financial stability, when questioned about Brexit.
2) Carney gave a clear hint that he might stay at the Bank of England for longer than planned.
The governor’s five-year term expires in July 2018, and he will decide this year whether to plump for a full eight-year term.
He said that domestic inflation pressure justified the hike, but cautioned that policymakers need to be aware that safe-haven currencies, and riskier ones, could both be buffeted as commodity prices tumble.
Bank of England governor Mark Carney says he’s a fine choice (although would he really say anything else?….)
Andrew is an extraordinary public servant who has devoted his entire professional life to serving the people of the United Kingdom.
During his career, he has worked across all of the Bank’s policy areas, combining leadership and innovation to deliver consistently the Bank’s policy objectives. His work in helping to manage the crisis and then to develop the post-crisis regulatory framework has been exemplary.
Here’s some instant reaction:
Andrew Bailey named as new FCA chief
Newsflash: Britain has a new City regulator.
Andrew Bailey, the deputy governor of the Bank of England, has just been named as the new chief executive of the Financial Conduct Authority.
He replaces Martin Wheatley, who was ousted by chancellor George Osborne last July.
Bailey has been in charge of prudential regulation at the Bank of England – trying to sure that banks stick to the rules, and avoid the damaging risks that caused the 2008 financial crisis.
Osborne’s decision to sent Wheatley packing last year has been seen as a sign that the British government was taking a friendlier approach to the City.
Analysts are divided over the severity of the Chinese slowdown.
Yogi Dewan, founder of Hassium Asset Management (a wealth management firm) told Bloomberg TV that China is “slowing, not melting down”.
He argues that Beijing are taking some “very positive” steps, including devaluing the yuan and building close financial links with Europe.
But Joseph Oughourlian of Amber Capital Investment Management is less optimistic. He is steering clear of companies who benefitted from China’s investment boom over the last 15 years.
FXTM Research Analyst Lukman Otunuga says investors are worried that capital will continue to ooze out of China, as people try to escape its slowing economy:
A re-established wave of risk aversion gripped Asian equities sending most into red territory, while elevated fears that China capital outflows may accelerate as the economy decelerates has sent the Shanghai Composite Index diving -6.3% lower, to levels not seen in 13 months.
With days like today continuing to come back to haunt the Shanghai Composite Index, the Chinese New Year period and the trading break couldn’t come soon enough.
Shares in easyJet have dropped by 2%, after the company reported that recent terror attacks have weakened demand.
The budget airline said revenue suffered after November’s Paris terror attack, and the bombing of a plane flying form Egypt’s Sharm el-Sheikh.
The recent market turmoil has also been a mixed blessing for the airline. The fall in the oil price will save it £180m on fuel costs, however currency moves will wipe out £50m.
In other words, easyJet needs fewer dollars to pay for fuel, but it needs to stump up more pounds to buy the dollars first….
Today’s selloff comes nearly a week after global markets slumped into bear market territory, triggering alarm around the world:
Simon Smith, chief economist at currency trading firm FXPro, fears that more market turbulence is coming.
Chinese indices are 6% lower overnight, Japanese over 2% in the red and oil is back below 30 bucks a barrel.
Volatility has been rising throughout the year so far but we’re still someway off the big spike in the Vix (volatility index or ‘fear gauge’) last August and so there’s potential for moves in markets to get even more dramatic.
Crude is sliding on renewed oversupply fears and even the building narrative we’re seeing from Opec that they are ready to strike a deal with other producer nations – possibly centred around Russia – doesn’t really appear to be lending any support to the equation, at least not yet.
The gold price has jumped by 1%, as money pours out of shares and into safe-haven assets.
That’s usually a sign that investors are worried.
Other European markets are also falling, with France’s CAC down 1.6% and the German DAX shedding 1.3%:
FTSE 100 falls 1.5% at the start of trading.
The FTSE 100 index of major UK companies has fallen by 87 points at the start of trading, or 1.4%, to 5789
Almost every share is falling, as traders face another day of volatile trading dominated by fears over the global economy.
BP and Royal Dutch Shell are both down around 3%, mirroring today’s sliding oil price.
Mining companies are also suffering, reflecting worries about China. Commodity trader Glencore has shed 3.5%, and Anglo American (which produces iron ore, copper, nickel etc) is down 3.2%
Almost every share on the Chinese stock market was hit by today’s rout, with only four gaining ground.
Chinese stock markets slumps 6% to 13 month low
A late wave of selling has gripped the Shanghai stock market, sending shares slumping and triggering new angst in financial markets worldwide.
China’s benchmark index, the CSI 300, shed 188 points or 6.02% to finish the day at 2940. That’s its lowest level since December 2014.
Scores of shares were suspended after falling 10%, the maximum allowed under Chinese stock market regulations.
The Shanghai market tumbled by 6.4%, the biggest daily loss since the first week of 2015.
The selloff, which helped to drive oil down, came after new economic data showed that China’s rail freight volume dropped by 11.9% last year, compared to 2014.
That fuelled fears that China’s economy is slowing faster than official figures show.
Oil drops back through $30
The crude oil price has lurched back through $30 per barrel.
Brent crude has slumped by 3% this morning, and is changing hands at $29.61 per barrel.
The selloff is partly being driven by oversupply fears, with OPEC members sticking to their guns and keeping pumping in an apparent attempt to drive other suppliers out of business.
Kit Juckes of French bank Société Générale says the weak oil price will add to the gloomy mood in the markets:
The fall in oil prices will make most of the headlines and drive most of the movement in markets today, unless it is reversed for no particularly good reason. The latest driver is the news that Iraqi oil output is strong. US production remains the key swing on supply and is what will eventually trigger a turn. But it will take hard news about declining US output to shift the market mood.
Introduction: Losses expected in Europe after Asian falls
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
It looks like being another ‘challenging’ day in the markets.
Asia’s two-day rally has hit the wall, with most markets falling.
Japan’s Nikkei just closed down 2.4%, and we’re expecting European stock markets to fall at the open (8an GMT).
The surge of optimism which pushed shares higher at the end of last week has dissolved, in the face of worries about deflation and economic slowdown.
In the corporate sector, budget airline easyJet and high street tech chain Dixons Carphone are releasing results.
Mark Carney, Governor of the Bank of England, is testifying to MPs this morning about the BoE’s financial stability report, from 10am GMT.
And we’ll have an eye on Greece, where unions are expected to hold a protest rally in Athens today against pension cuts. That comes as
We’ll be tracking all the main events through the day….