{"id":48849,"date":"2016-02-10T01:10:03","date_gmt":"2016-02-10T00:10:03","guid":{"rendered":"http:\/\/beta.next-finance.net\/strategie\/fed-oil-yuan-towards-a-triple-capitulation\/"},"modified":"2019-12-31T00:28:28","modified_gmt":"2019-12-30T23:28:28","slug":"fed-oil-yuan-towards-a-triple-capitulation","status":"publish","type":"post","link":"http:\/\/beta.next-finance.net\/en\/strategie\/fed-oil-yuan-towards-a-triple-capitulation\/","title":{"rendered":"Fed, Oil, yuan: towards a triple capitulation?"},"content":{"rendered":"

This context was symbolized by the fall in the oil price, which crystallizes all of
\nthe fears stemming from sluggish global trade and risk aversion.<\/p>\n

Which factors could therefore trigger an inversion of the bearish market trend in which investors
\nseem to see nothing but the glass as half-empty? Three key drivers could possibly inverse market
\nsentiment over the relatively short term.<\/p>\n

The Federal Reserve could acknowledge that the US cycle is less robust than expected.
\nDespite persistent strength in the labour market, corporate investments are seriously
\nstruggling to take off (see chart).
\nThe US cycle probably peaked in 2015, and the Fed
\nshould review its rate-tightening policy if economic indicators show further signs of
\nweakness (in fact, the ISM Manufacturing Index continues to fall).<\/quote>
\n The Fed is, of course,
\nrefusing to take into account signals sent by Wall Street currently, and is being careful to
\ndispel the idea that the stock market influences its policy. Indeed, the FED used the
\nmarket to influence household mindset, over a period of several years, by maintaining a
\nmajor wealth effect through unprecedented quantitative easing, which greatly fueled a
\nstrong rally in the equity market. For now, we prefer fixed-income assets, in anticipation
\nof a more dovish tone from the Fed, but a shift back into equities could be considered,
\neven if the market should benefit from fewer share buybacks.<\/p>\n

\"us_corporate_investment_outlook.jpg\"<\/a><\/p>\n

Concerning the oil price, the underlying trend should also be closely watched during the
\ncoming year for any potential turnaround. The overproduction strategy adopted by Saudi
\nArabia to undermine the profitability of US shale oil is currently a success. There has
\nbeen a surge in high-yield defaults in the oil industry and the US banks will soon restrict
\ntheir funding in this sector, which is seeing profitability and solvency nosedive. As a
\nresult, drilling and extraction projects in the US will slow down in line with the fall in the
\nprice of crude oil (see chart).
\nThe risk of another subprime crisis in the US is limited,
\neven though a large proportion of the (allegedly liquid) debt has been repackaged into
\nthe financial system as classic investment products.<\/quote>
\n However, oil-producing countries
\nmay now perceive the possibility of capping production and turn prices up again, even in
\na context of reduced global demand. Indeed, those very low prices strongly penalize
\ncountries whose budgets depend largely on income from the energy sector. Direct or
\nindirect exposure (energy sector equities, oil-producing emerging markets countries,
\nCanadian dollar and Norwegian krone, or even the break-even inflation rate in the US)
\ncould be built up progressively to capture the potential turnaround.<\/p>\n

\"brent_spot_price_per_barrel_vs_us_rig_count.jpg\"<\/a><\/p>\n

The third inversion will perhaps take place within the Chinese economy. If the economic
\nclimate continues to darken (see chart below: railway freight is often a reliable leading
\nindicator for future growth), the authorities will not be able to drive growth indicators
\neternally and will have to implement some real measures. Supporting the yuan is proving
\nto be a costly policy in terms of foreign currency reserves, with almost 20% of reserves
\nevaporated since summer 2015.
\nReinforcing currency controls would progressively
\nsqueeze China out of global trade and could worsen the credit crunch by preventing
\ncapital from entering the country. A more radical devaluation, on the other hand, would
\ndeteriorate domestic spending power, due to rising import prices, but would nonetheless
\nopen the door to implementing strong budgetary stimulus, without deepening the
\nbalance of payments deficit, as local investors would no longer have any reason to
\nwithdraw capital once the currency has adjusted.<\/quote>
\n Currently, we prefer to avoid all assets
\nin the region (Asian equities, developed and emerging currencies, and especially credit).
\nIf such a shift takes place, it could rekindle the Chinese economy, which could then
\ncontinue its transition towards a more domestic consumer-driven model.<\/p>\n

\"china_-_real_gdp_vs_railway_freight_year-on-year_.jpg\"<\/a><\/p>\n

These three potential shifts in policy, which could be implemented over the course of this year,
\nclearly represent at least three solid reasons to believe that markets may yet post robust
\nperformances in 2016. Furthermore, the ECB\u2019s accommodating policy will also remain a constant
\nunderlying support factor. However, 2016 yields will certainly be lower than preceding years.
\nInterest rates are at a very low point and risky assets may need to correct some of their past
\nexcesses.<\/strong>