The Economist Intelligence Unit has reported that last month foreign direct investment flows into emerging markets exceeded, for the first time, those into developed markets.
Overall fund flows have slumped by half since their 2007 highs so developed economies are facing a significant drop. Is this yet another cue to steer clear of developed economies? Or else could this point to another bubble in emerging markets?
Asia has been the chief beneficiary of this change in the pattern of fund flows. This is no real surprise - international money looks for a home where it can generate decent returns and Asia has the strongest growth story of all the emerging markets. The IMF has just doubled its forecast for Asian growth, which is driven by improving exports. There seems to be a real possibility that some measure of decoupling is happening after all as Asian domestic demand emerges to fill the hole left by a weakened US.
Just as developed markets are struggling to shore up their property and investment markets, the governments of some Asian countries are worrying about bubbles. The Singapore property market, for example, has risen more than 15% since the start of the year and is seeing a flood of Russian money in search of a stable home. But this is not just confined to Asia - Nicholas Eyzaguirre, western hemisphere director of the IMF, recent warned in an interview with the FT that Latin America had weathered the crisis so well that appreciating currencies and inflows of foreign capital could generate bubbles in future.
This bounce-back has certainly been reflected in stock markets.The FTSE Xinhua is around 65% ahead over the year to date, compared with around 12% for the FTSE 100. The worry for investors now is that all the good news may be in the price of emerging markets. After all, does anyone really expect developed economies to outpace those of emerging markets? Pretty much everyone sees that emerging markets are currently the engine of world growth, which at the very least should be ringing some contrarian alarm bells.
That said, it is likely to be some time before this becomes a real issue. Plenty of fund managers talk about the amount of cash sitting on the sidelines. It has to go somewhere and it's unlikely to find its way into developed markets as a priority. Emerging markets have always been subject to huge waves of optimism and then widespread sell-offs. It's just a question of being aware of when things might have gone too far, so investors should remain alert
www.sterlingfs.co.uk
Monday, 9 November 2009
Is this the start of the Bull Run?
It does not seem that long ago, when the global financial systems was on the brink of collapse of a biblical proportion. It now appears that the joint efforts of central banks and Governments across the world have averted the complete systemic collapse.
This has prompted a generally more optimistic outlook by investors and economist on the future of the global economy. This has helped the FTSE 100, to achieve growth of 15%, in just one month and this begs the question; is this bull market returning or is it just a bear market rally?
Japan, Germany and France have all successfully returned to economic growth, to the surprise of many economists. All three countries have been experiencing abnormally deep recession, since these countries are massive exporters on the global market. When world trade start to decline in late 2008, it became apparent that net exports would take the brunt of the fall in global demand. With these major economies lifting themselves out the current recession, this is adding optimism to investors that world trade can recover and that other developed nations would achieve growth in the 3rd quarter.
The world's biggest economy is starting to show tentative signs of economic recovery, as the big government programs start to take effect. The most notable of these policies is the recent "cash for clunkers" program. In essence consumers are given credits of either $3,500 or $4,500 for turning in certain gas-guzzling, environmentally unfriendly vehicles and buying new, more fuel-efficient ones. This program was so much of success that the US government had to extend the funds available from one billion to three billion, to cover the cost of the rebate. Overall there has been over 700,000 cars sold, which has handed a much-needed lifeline to the American car industry. This combined with the other American stimulus packages should help the economy achieve growth in the 3rd quarter and signal the start of the Bull Run.
Historically bull markets nearly always start a midst a barrage of dire economic news, at the point when investor confidence is rock bottom. An important indicator is the Bloomberg survey of experienced investors, which in essence is a survey of approximately 300 top investors in attempt to gauge investor sentiment. When the market reached its lows in March, the survey illustrated a severe lack of confidence and the average investor was holding approximately 45% of their funds in cash; which is a record high. However, at the start of August the amount of cash held by experience investors was just 25%, which represents a massive increase in optimism.
The general public has also mirrored this optimism, as show with the rise in sales of investment funds. The Investment Management Association says net retail sales in June sky rocketed to £2.5bn, from £128m in the same month last year, while investment ISA's sales hit a six-year high.This private and investor confidence will give the market the additional influx of cash to help stimulate the market and make a Bull Run more sustainable.
On the other-side of the argument, the pessimists are still keen to point out the fundamental problems that still remain in the global economy. One of the main concerns is the unprecedented amount of economic stimulus released by the governments and central banks. This economic stimulus packages is creating two major concerns, first concern being inflationary pressure in the long term. The low interest rates and asset purchasing programs used by the governments is essentially increasing the supply of money and in most cases reducing the value of the currency. Therefore, it is reasonable to assume that all this additional money in the system will cause inflationary pressure.
The global economy is in essence on government life support, the massive monetary and fiscal stimulus is keeping the economies of the world "alive and kicking". However, these emergency measures cannot continue forever and when the government start to remove aid from these economies, this is where problems may occur. Interest rates inevitable will begin to rise again and governments will adjust the fiscal spending to pre-credit crunch levels. The combination of these factors will cause economic drag on company profits and employment. This careful balancing act is one of the most unknown factors facing the current economic climate.
The recent rally in the stock market could be the start of the Bull Run or a bear market rally. Only time will tell; the evidence is there to back either side of the argument. We would recommend a balanced cautious and diversified approach to investing; after all, the tortoise did beat the hare.
This has prompted a generally more optimistic outlook by investors and economist on the future of the global economy. This has helped the FTSE 100, to achieve growth of 15%, in just one month and this begs the question; is this bull market returning or is it just a bear market rally?
Japan, Germany and France have all successfully returned to economic growth, to the surprise of many economists. All three countries have been experiencing abnormally deep recession, since these countries are massive exporters on the global market. When world trade start to decline in late 2008, it became apparent that net exports would take the brunt of the fall in global demand. With these major economies lifting themselves out the current recession, this is adding optimism to investors that world trade can recover and that other developed nations would achieve growth in the 3rd quarter.
The world's biggest economy is starting to show tentative signs of economic recovery, as the big government programs start to take effect. The most notable of these policies is the recent "cash for clunkers" program. In essence consumers are given credits of either $3,500 or $4,500 for turning in certain gas-guzzling, environmentally unfriendly vehicles and buying new, more fuel-efficient ones. This program was so much of success that the US government had to extend the funds available from one billion to three billion, to cover the cost of the rebate. Overall there has been over 700,000 cars sold, which has handed a much-needed lifeline to the American car industry. This combined with the other American stimulus packages should help the economy achieve growth in the 3rd quarter and signal the start of the Bull Run.
Historically bull markets nearly always start a midst a barrage of dire economic news, at the point when investor confidence is rock bottom. An important indicator is the Bloomberg survey of experienced investors, which in essence is a survey of approximately 300 top investors in attempt to gauge investor sentiment. When the market reached its lows in March, the survey illustrated a severe lack of confidence and the average investor was holding approximately 45% of their funds in cash; which is a record high. However, at the start of August the amount of cash held by experience investors was just 25%, which represents a massive increase in optimism.
The general public has also mirrored this optimism, as show with the rise in sales of investment funds. The Investment Management Association says net retail sales in June sky rocketed to £2.5bn, from £128m in the same month last year, while investment ISA's sales hit a six-year high.This private and investor confidence will give the market the additional influx of cash to help stimulate the market and make a Bull Run more sustainable.
On the other-side of the argument, the pessimists are still keen to point out the fundamental problems that still remain in the global economy. One of the main concerns is the unprecedented amount of economic stimulus released by the governments and central banks. This economic stimulus packages is creating two major concerns, first concern being inflationary pressure in the long term. The low interest rates and asset purchasing programs used by the governments is essentially increasing the supply of money and in most cases reducing the value of the currency. Therefore, it is reasonable to assume that all this additional money in the system will cause inflationary pressure.
The global economy is in essence on government life support, the massive monetary and fiscal stimulus is keeping the economies of the world "alive and kicking". However, these emergency measures cannot continue forever and when the government start to remove aid from these economies, this is where problems may occur. Interest rates inevitable will begin to rise again and governments will adjust the fiscal spending to pre-credit crunch levels. The combination of these factors will cause economic drag on company profits and employment. This careful balancing act is one of the most unknown factors facing the current economic climate.
The recent rally in the stock market could be the start of the Bull Run or a bear market rally. Only time will tell; the evidence is there to back either side of the argument. We would recommend a balanced cautious and diversified approach to investing; after all, the tortoise did beat the hare.
Does China hold the key to global recovery?
China has often been described as the sleeping giant of the world economy, but over the last 10 years it is apparent that the giant is awake.
The dynamics of China economic structure is enigma to most westerns, due to its unique balance of a single party communist government and free market capitalism. For all China's strengths, is it able to lift the global economy out its deep recession?
Since the end of the cold war China has been experiencing the most remarkable realisation of its economic potential, this has helped to establish itself as global economic superpower. This was built on the back of cheap labour and natural resources, this has made China the world's production house. China is the second largest net exporter in the world and these exports are directly responsible for a sustained economic growth rate of approximately 8%, over the last 15 years.
China has shown remarkable resistance to the economic downturn and it is believed that the economic growth may accelerate to 8.5 percent, in the 3rd quarter. This is partly down to moderately loose monetary policy position by the Chinese government and a considerable fiscal stimulus package worth in the region of £250 billion. This optimism and growth is leading many investors and economist to believe that China's growth is enough to stimulate the world economy.
The development of the China's domestic consumer is the key, as the standard of living rises for the most populous nation on earth, their demand for raw materials and foreign goods will undoubtedly rise. The 1.4 billion Chinese, are in the process of westernisation and catching the consumer bug quickly. There are many socioeconomic factors behind the shift in spending patterns; most of it is accountable to the new generation of Chinese consumers who are heavily influenced by western media. This generation have migrated from the countryside to the newly built urbanised cities, in search of work and new opportunities. This has generated the fastest growing consumer market on earth; therefore, if China continues to demand foreign goods throughout this economic downturn it will add additional boost to global economies.
However, all the signs for China are not all positive in recent weeks there have a numerous jitters by investors, the largest of which caused a 5.45% drop in the Shanghai Stock Exchange (SSE). This is because there is feeling amongst more cautious or pessimistic economist that the fundamentals problems still remain in the global economies and that China is unable to survive on just domestic demand. This is reverberated by global trade falling by approximately 12%; this directly caused many factories to close and generated a high amount of unemployment.
There is another fundamental issue with the assumption that China is able to lift the world out of the recession, it just isn't large enough. Possible in five to ten years China will have the industrial might, to make up substantial amount of global consumption but as it stands, China only makes 8% of the global economy.
Unquestionable China's influence on the world economy is important, nevertheless a global recovery is impossible without the American and European consumers who make up 45% of global consumption. Without these two super-states in an upward economic cycle, it will be difficult for world economy to recover to pre-recession levels.
The dynamics of China economic structure is enigma to most westerns, due to its unique balance of a single party communist government and free market capitalism. For all China's strengths, is it able to lift the global economy out its deep recession?
Since the end of the cold war China has been experiencing the most remarkable realisation of its economic potential, this has helped to establish itself as global economic superpower. This was built on the back of cheap labour and natural resources, this has made China the world's production house. China is the second largest net exporter in the world and these exports are directly responsible for a sustained economic growth rate of approximately 8%, over the last 15 years.
China has shown remarkable resistance to the economic downturn and it is believed that the economic growth may accelerate to 8.5 percent, in the 3rd quarter. This is partly down to moderately loose monetary policy position by the Chinese government and a considerable fiscal stimulus package worth in the region of £250 billion. This optimism and growth is leading many investors and economist to believe that China's growth is enough to stimulate the world economy.
The development of the China's domestic consumer is the key, as the standard of living rises for the most populous nation on earth, their demand for raw materials and foreign goods will undoubtedly rise. The 1.4 billion Chinese, are in the process of westernisation and catching the consumer bug quickly. There are many socioeconomic factors behind the shift in spending patterns; most of it is accountable to the new generation of Chinese consumers who are heavily influenced by western media. This generation have migrated from the countryside to the newly built urbanised cities, in search of work and new opportunities. This has generated the fastest growing consumer market on earth; therefore, if China continues to demand foreign goods throughout this economic downturn it will add additional boost to global economies.
However, all the signs for China are not all positive in recent weeks there have a numerous jitters by investors, the largest of which caused a 5.45% drop in the Shanghai Stock Exchange (SSE). This is because there is feeling amongst more cautious or pessimistic economist that the fundamentals problems still remain in the global economies and that China is unable to survive on just domestic demand. This is reverberated by global trade falling by approximately 12%; this directly caused many factories to close and generated a high amount of unemployment.
There is another fundamental issue with the assumption that China is able to lift the world out of the recession, it just isn't large enough. Possible in five to ten years China will have the industrial might, to make up substantial amount of global consumption but as it stands, China only makes 8% of the global economy.
Unquestionable China's influence on the world economy is important, nevertheless a global recovery is impossible without the American and European consumers who make up 45% of global consumption. Without these two super-states in an upward economic cycle, it will be difficult for world economy to recover to pre-recession levels.
Are there "Greens Shoots" of economic recovery?
In recent months it has been hard to escape the media talking about possible "green shoots" of economic recovery.
Ever since the head of the America Federal Reserve Ben Benanke coined the phrase in November last year, every economist has been looking for signs to be optimistic about the financial crisis and subsequently the recession.
Are people being too optimistic about recovery or is the economy going to enter another period of growth soon that expected?
As investors weigh up each piece of economic data, in recent months the optimistic view started to gain some serious ground. The global equity markets have rallied over the past 3 months, with the FTSE 100 gaining roughly 30% or 1000 points on the belief that recovery is insight.
One of the major factors in the recent rally is the general improvement in consumer confidence and retail sales, not only in the UK, but more importantly America. A key indicator is the "Nationwide Consumer Confidence Index", which is designed to paint a broad picture of consumer sentiment in the UK. This measure has improved significantly since the beginning of the year, with 28% of the people in the survey now believing that the economy will be better in 6 months. Moreover, there has been better than expected first quarter sales results for blue chip retail companies such as Tesco, Sainsbury's and Next. For these reasons many investor are starting to move their resources back into the retail sector and actually starting to believe that economic recovery in the UK is possible before the end of the year.
Another reason for the recent rallies is the moderation of job loses in America; over recent months there has been a sharp fall in the pace of job losses in the United States. The improving conditions in the world's largest economy is suggesting to many economist that the worst of the recession is starting to pass and that recovery could be possible by the end of the year.
One more important factor is "The American Recovery and Reinvestment Act" is a stimulus package orchestrated by the Obama administration, which is designed to pump a massive 786 billion dollars into their flagging economy. This Stimulus package has reportedly helped to create or save 150,000 jobs in both the public and private sector so far. This is one of the most proactive and costly pieces of legislation ever written; the Obama administration is hoping this massive investment will be able to jumpstart the economy by creating millions of jobs.
However, there are still plenty of reasons for people to remain sceptical for a quick economic recovery for both the UK and global economies. Due to the truly global nature of trade in the modern world, what happens in one country and can significantly impact other countries in the world. Since the start of the year, world trade has dropped by roughly 12%. This has left many economists to believe that until international trade starts to recover there is little chance of a quick recovery.
Another factor playing on investor's minds is the current debt levels of individuals, businesses and government. The amount of debt that still remains in the economy is going to seriously affect the countries ability to recover. The average British consumer has taken on vast amount of debt over the last 10 years and the repayments on this debt are now affecting possible growth in the future.
This is not just isolated to the individual; this problem is affecting businesses that did not foresee this economic downturn. Companies were often borrowing large amounts of money to fund expansion, with the belief that the economy was going to continue to grow. This debt is now reducing profitability of these companies and consequently forcing them to cut costs; most notably their workforce and production.
The British government has its own debt issues caused by the banking bailouts, the cut in value added tax (VAT) and reduced income tax revenue. This has left the British treasury department with historic levels of debt. This debt will have to eventually be repaid, therefore it would be prudent to expect rises in the general level of taxation over the next few years to try and balance the public purse. This taxation will no doubt reduce the amount of disposable income that British public has in their pocket, consequently reducing the amount of consumption and delaying the economic recovery.
There still remains some very serious problems within the economy however; the positive fast acting steps taken by governments around the world has seriously reduced the risk of a sustain period of economic downturn. The case for a rapid economic recovery could be overly optimist but on the other hand, the risk of a depression very pessimistic
Ever since the head of the America Federal Reserve Ben Benanke coined the phrase in November last year, every economist has been looking for signs to be optimistic about the financial crisis and subsequently the recession.
Are people being too optimistic about recovery or is the economy going to enter another period of growth soon that expected?
As investors weigh up each piece of economic data, in recent months the optimistic view started to gain some serious ground. The global equity markets have rallied over the past 3 months, with the FTSE 100 gaining roughly 30% or 1000 points on the belief that recovery is insight.
One of the major factors in the recent rally is the general improvement in consumer confidence and retail sales, not only in the UK, but more importantly America. A key indicator is the "Nationwide Consumer Confidence Index", which is designed to paint a broad picture of consumer sentiment in the UK. This measure has improved significantly since the beginning of the year, with 28% of the people in the survey now believing that the economy will be better in 6 months. Moreover, there has been better than expected first quarter sales results for blue chip retail companies such as Tesco, Sainsbury's and Next. For these reasons many investor are starting to move their resources back into the retail sector and actually starting to believe that economic recovery in the UK is possible before the end of the year.
Another reason for the recent rallies is the moderation of job loses in America; over recent months there has been a sharp fall in the pace of job losses in the United States. The improving conditions in the world's largest economy is suggesting to many economist that the worst of the recession is starting to pass and that recovery could be possible by the end of the year.
One more important factor is "The American Recovery and Reinvestment Act" is a stimulus package orchestrated by the Obama administration, which is designed to pump a massive 786 billion dollars into their flagging economy. This Stimulus package has reportedly helped to create or save 150,000 jobs in both the public and private sector so far. This is one of the most proactive and costly pieces of legislation ever written; the Obama administration is hoping this massive investment will be able to jumpstart the economy by creating millions of jobs.
However, there are still plenty of reasons for people to remain sceptical for a quick economic recovery for both the UK and global economies. Due to the truly global nature of trade in the modern world, what happens in one country and can significantly impact other countries in the world. Since the start of the year, world trade has dropped by roughly 12%. This has left many economists to believe that until international trade starts to recover there is little chance of a quick recovery.
Another factor playing on investor's minds is the current debt levels of individuals, businesses and government. The amount of debt that still remains in the economy is going to seriously affect the countries ability to recover. The average British consumer has taken on vast amount of debt over the last 10 years and the repayments on this debt are now affecting possible growth in the future.
This is not just isolated to the individual; this problem is affecting businesses that did not foresee this economic downturn. Companies were often borrowing large amounts of money to fund expansion, with the belief that the economy was going to continue to grow. This debt is now reducing profitability of these companies and consequently forcing them to cut costs; most notably their workforce and production.
The British government has its own debt issues caused by the banking bailouts, the cut in value added tax (VAT) and reduced income tax revenue. This has left the British treasury department with historic levels of debt. This debt will have to eventually be repaid, therefore it would be prudent to expect rises in the general level of taxation over the next few years to try and balance the public purse. This taxation will no doubt reduce the amount of disposable income that British public has in their pocket, consequently reducing the amount of consumption and delaying the economic recovery.
There still remains some very serious problems within the economy however; the positive fast acting steps taken by governments around the world has seriously reduced the risk of a sustain period of economic downturn. The case for a rapid economic recovery could be overly optimist but on the other hand, the risk of a depression very pessimistic
Is the UK in too much debt?
This week chancellor Alistair Darling revealed his budget to the British nation; it was billed as the "most important budget of a generation" due to the continuing recession.
The budget itself had the largest amount of public sector borrowing in history at 175 billion pounds and this does not even include the various amount of aid given to the banking sector. In other news this week 900,000 thousand people are now paying mortgages that are more expensive than the value of their houses and, therefore, in a position called "negative equity". With the public and private debt reaching historic highs this raises some serious questions about the UK ability to steer a safe passage out the recession.
With the chancellor having the problem of raising an additional 175 billion pounds to cover the shortfall between the amount of money raised in tax and the amount of money he has spent in the budget. Essentially, the government borrows money from the public by issuing various government bonds. The standard government bond is called a Gilted Edge Security and is a promise from the government to pay the holder a certain amount of money when redeemed, plus interest payments. There is rising concern in the government bond market since the UK's Debt Management Office will be issuing £220 billion in bonds this year. However, this is not likely to affect the UK's AAA credit rating - there is very little chance that the UK government will be unable to repay this debt or Default on the payments thus, GILTs still remain a safe investment. In addition it is widely felt that bold steps taken by the government are necessary to help bring the country out the recession.
On the other side of the debt issue is private debt with two main issues "negative equity" on property and vast amount of credit card debt (unsecured debt). House prices have dropped nationally, according to the Halifax by £42,474, which is equivalent to 17.5% off their August 2007 highs of £199,700. This has left 900,000 people in the position of negative equity. Nevertheless unlike the last housing crash in Britain (1991-1993) there seems to be less correlation between negative equity and the ability of homeowners to repay their mortgage and for that reason negative equity is only truly affecting those who wish to move.
The amount of unsecured personal debt has sky rocketed over the past 10 years, mainly as a result of easy credit and low interest rates. These unsecured personal debts, mainly consisting of personal loans, store cards and credit cards, has reached roughly 216 billion pounds - approximately £4750 for every UK adult. If you include mortgages, it rises to circa £31,000 each. In spite of this, the recession appears to be having a positive effect on both debt and saving rates. The recession is encouraging people to pay off debt. In 2008 the British public repaid a massive 38.6 billion pounds in unsecured debt. Another important factor is that people are starting to save a higher proportion of their income each month - this is the first increase since 2001. The combinations of these factors are going to strengthen the private credit position of UK, which will help to recapitalise the banking system therefore increasing the flow of credit.
It would be unwise to think that ten years of national exuberance can be fixed overnight, but the rebalancing processing is certainly underway.
The budget itself had the largest amount of public sector borrowing in history at 175 billion pounds and this does not even include the various amount of aid given to the banking sector. In other news this week 900,000 thousand people are now paying mortgages that are more expensive than the value of their houses and, therefore, in a position called "negative equity". With the public and private debt reaching historic highs this raises some serious questions about the UK ability to steer a safe passage out the recession.
With the chancellor having the problem of raising an additional 175 billion pounds to cover the shortfall between the amount of money raised in tax and the amount of money he has spent in the budget. Essentially, the government borrows money from the public by issuing various government bonds. The standard government bond is called a Gilted Edge Security and is a promise from the government to pay the holder a certain amount of money when redeemed, plus interest payments. There is rising concern in the government bond market since the UK's Debt Management Office will be issuing £220 billion in bonds this year. However, this is not likely to affect the UK's AAA credit rating - there is very little chance that the UK government will be unable to repay this debt or Default on the payments thus, GILTs still remain a safe investment. In addition it is widely felt that bold steps taken by the government are necessary to help bring the country out the recession.
On the other side of the debt issue is private debt with two main issues "negative equity" on property and vast amount of credit card debt (unsecured debt). House prices have dropped nationally, according to the Halifax by £42,474, which is equivalent to 17.5% off their August 2007 highs of £199,700. This has left 900,000 people in the position of negative equity. Nevertheless unlike the last housing crash in Britain (1991-1993) there seems to be less correlation between negative equity and the ability of homeowners to repay their mortgage and for that reason negative equity is only truly affecting those who wish to move.
The amount of unsecured personal debt has sky rocketed over the past 10 years, mainly as a result of easy credit and low interest rates. These unsecured personal debts, mainly consisting of personal loans, store cards and credit cards, has reached roughly 216 billion pounds - approximately £4750 for every UK adult. If you include mortgages, it rises to circa £31,000 each. In spite of this, the recession appears to be having a positive effect on both debt and saving rates. The recession is encouraging people to pay off debt. In 2008 the British public repaid a massive 38.6 billion pounds in unsecured debt. Another important factor is that people are starting to save a higher proportion of their income each month - this is the first increase since 2001. The combinations of these factors are going to strengthen the private credit position of UK, which will help to recapitalise the banking system therefore increasing the flow of credit.
It would be unwise to think that ten years of national exuberance can be fixed overnight, but the rebalancing processing is certainly underway.
Where is the price of oil heading
The price of oil is one of the most important economic factors in the modern global economy. This is largely due to mankind's dependence on the substance to provide cheap energy.
Over the past year the price of oil has been extremely volatile, especially last summer when the price per barrel tripled to $147.50, which, in turn pushed the price of petrol up to £1.20 in the UK. As we enter the summer period is the price likely to spike again?
It is important to understand that there are various factors that affect the demand and supply of oil in global markets; these bring about fluctuations in the price on a daily basis. Over recent months the price of oil has started to rally off its lows of $32.40, this is slightly enigmatic, because there is still a large amount of downside pressure on the price of oil. The global financial crisis has affected the consumption of oil globally; this should add downwards pressure to the market. Combined with the high amount of reserves held by the industrialised nations such as the UK and the US; this should give further downside pressure to oil prices.
Another major factor is the amount of oil in the market and this is determined by the Organisation of Oil Produces Countries (OPEC). OPEC is to all intents and purposes an international cartel that includes such countries as Saudi Arabian, Iran and Venezuela. The purpose of this cartel is to protect the interests of member nations by controlling the production of oil, they do this by setting quotas on how much oil they take out of the ground, this gives them a large amount of control over the price of oil. In recent months they have cut production to try and increase the price of oil, with their target being in the region of $65-80 dollars a barrel.
There has also been an escalation of trouble in the OPEC member Nigeria. There have been countless clashes between the Nigerian government troops and rebel group in the area. The rebel group is fighting for fair redistribution of their natural resources and uses standard guerrilla tactics to strike oil pipelines and pumps. Nigeria is the 5th biggest exporter to the US; with uncertainty in the nation this is adding upward pressure to oil prices.
Last year, when the price of oil was heading towards it peak, there was a lot of talk about speculation within the oil market by international traders and hedge funds. There are initial signs that traders and hedge funds are beginning to speculate again as a simple hedge against potential inflation. Speculation on oil futures creates significantly unpredictable prices and much of OPEC's efforts to manage production may once again be in vein.
Should we see a surge in prices and continued volatility, the oil and commodity investment markets are likely see much tighter regulation from the international community.
With the intervention of the international community and sensible production from OPEC, the price of oil should be relatively stable and it is reasonable to expect the market to remain within the price range targeted.
www.sterlingfs.co.uk
Over the past year the price of oil has been extremely volatile, especially last summer when the price per barrel tripled to $147.50, which, in turn pushed the price of petrol up to £1.20 in the UK. As we enter the summer period is the price likely to spike again?
It is important to understand that there are various factors that affect the demand and supply of oil in global markets; these bring about fluctuations in the price on a daily basis. Over recent months the price of oil has started to rally off its lows of $32.40, this is slightly enigmatic, because there is still a large amount of downside pressure on the price of oil. The global financial crisis has affected the consumption of oil globally; this should add downwards pressure to the market. Combined with the high amount of reserves held by the industrialised nations such as the UK and the US; this should give further downside pressure to oil prices.
Another major factor is the amount of oil in the market and this is determined by the Organisation of Oil Produces Countries (OPEC). OPEC is to all intents and purposes an international cartel that includes such countries as Saudi Arabian, Iran and Venezuela. The purpose of this cartel is to protect the interests of member nations by controlling the production of oil, they do this by setting quotas on how much oil they take out of the ground, this gives them a large amount of control over the price of oil. In recent months they have cut production to try and increase the price of oil, with their target being in the region of $65-80 dollars a barrel.
There has also been an escalation of trouble in the OPEC member Nigeria. There have been countless clashes between the Nigerian government troops and rebel group in the area. The rebel group is fighting for fair redistribution of their natural resources and uses standard guerrilla tactics to strike oil pipelines and pumps. Nigeria is the 5th biggest exporter to the US; with uncertainty in the nation this is adding upward pressure to oil prices.
Last year, when the price of oil was heading towards it peak, there was a lot of talk about speculation within the oil market by international traders and hedge funds. There are initial signs that traders and hedge funds are beginning to speculate again as a simple hedge against potential inflation. Speculation on oil futures creates significantly unpredictable prices and much of OPEC's efforts to manage production may once again be in vein.
Should we see a surge in prices and continued volatility, the oil and commodity investment markets are likely see much tighter regulation from the international community.
With the intervention of the international community and sensible production from OPEC, the price of oil should be relatively stable and it is reasonable to expect the market to remain within the price range targeted.
www.sterlingfs.co.uk
Is Quantitative Easing going to help Britain out the recession?
Essentially quantitative easing is when the central bank of the country creates money out of thin air, so it can be injected into the financial sector. This only occurs when the central bank's base rate approaches zero and is seen as the last weapon in a central bank's arsenal.
Over the past 18 months the Bank of England has made various cuts in the base rate from 5.75% to 0.5% in an attempt to combat falling inflation and to pump liquidity in the market. On the 5th of March the Monetary Policy Committee (MPC) decided to create 75 billion pounds electronically to inject directly into the banking system in an attempt to stimulate the economy out the recession.
A perfect historical example of quantitative easing was demonstrated in Japan. Often referred to as the lost decade (from 1990-2000), Japan had almost no economic growth, deflation and high unemployment. The central bank was forced to lower the base rate to almost zero and faced with no way of creating any more liquidity, the Bank of Japan used quantitative easing to flood the banks with the liquidity. This helped increase commercial and private borrowing which, in turn, increased consumption and brought the economy out of deflation and, ultimately, recession. It would be naive to say that quantitative easing was the main reason that Japan recovered from recession but it certainly contributed.
Fast-forward to the present day and the rest of the world is in quite a similar predicament. The Bank of England is hoping that quantitative easing will be the solution to unclog the current credit markets and allow banks to make credit available to business and individuals. The bank of England also hopes that quantitative easing will help stabilise inflation towards their target of 2%.The Bank Of England desperately wants to prevent inflation turning into deflation as many forecasts predict. Deflation can be extremely destructive - people are reluctant to spend money when they perceive that goods will become cheaper in the future. On the other side of the argument many critics of the Bank of England's policy suggest that it will do nothing to help the recession and instead of helping the economy it will lead to devaluation of the pound as the additional money dilutes the currency value on world markets. Critics also suggest that "quantitative easing" will lead to hyperinflation, since pumping this newly created money into the economy would create upward pressure on prices. It is a quandary and an extremely complex balancing act.
Will quantitative easing help Britain out the recession? Yes, it will help - but quantitative easing is only part of the solution - in our view its main role will serve to help prevent economic conditions deteriorate further.
We take confidence from the speed in which interest rates have been reduced and how quickly the quantitative easing programme has been introduced. It is clear that the Government and Central Bank are prepared to act swiftly to prevent conditions becoming worst.
Only time will tell whether the actions that are being taken will work, but clearly, sitting back and doing nothing is not an option.
for more infomation visit. www.sterlingfs.co.uk
Over the past 18 months the Bank of England has made various cuts in the base rate from 5.75% to 0.5% in an attempt to combat falling inflation and to pump liquidity in the market. On the 5th of March the Monetary Policy Committee (MPC) decided to create 75 billion pounds electronically to inject directly into the banking system in an attempt to stimulate the economy out the recession.
A perfect historical example of quantitative easing was demonstrated in Japan. Often referred to as the lost decade (from 1990-2000), Japan had almost no economic growth, deflation and high unemployment. The central bank was forced to lower the base rate to almost zero and faced with no way of creating any more liquidity, the Bank of Japan used quantitative easing to flood the banks with the liquidity. This helped increase commercial and private borrowing which, in turn, increased consumption and brought the economy out of deflation and, ultimately, recession. It would be naive to say that quantitative easing was the main reason that Japan recovered from recession but it certainly contributed.
Fast-forward to the present day and the rest of the world is in quite a similar predicament. The Bank of England is hoping that quantitative easing will be the solution to unclog the current credit markets and allow banks to make credit available to business and individuals. The bank of England also hopes that quantitative easing will help stabilise inflation towards their target of 2%.The Bank Of England desperately wants to prevent inflation turning into deflation as many forecasts predict. Deflation can be extremely destructive - people are reluctant to spend money when they perceive that goods will become cheaper in the future. On the other side of the argument many critics of the Bank of England's policy suggest that it will do nothing to help the recession and instead of helping the economy it will lead to devaluation of the pound as the additional money dilutes the currency value on world markets. Critics also suggest that "quantitative easing" will lead to hyperinflation, since pumping this newly created money into the economy would create upward pressure on prices. It is a quandary and an extremely complex balancing act.
Will quantitative easing help Britain out the recession? Yes, it will help - but quantitative easing is only part of the solution - in our view its main role will serve to help prevent economic conditions deteriorate further.
We take confidence from the speed in which interest rates have been reduced and how quickly the quantitative easing programme has been introduced. It is clear that the Government and Central Bank are prepared to act swiftly to prevent conditions becoming worst.
Only time will tell whether the actions that are being taken will work, but clearly, sitting back and doing nothing is not an option.
for more infomation visit. www.sterlingfs.co.uk
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