Oil woes and Greece's place in the eurozone

Jan. 6: Auto mania, deja vu for Greece and the eurozone, and a flailing ISIS economy


Yesterday was a jumpy day around the world, and it seems everyone is starting Tuesday off on a skittish note, too. On Monday – the second day of trading for 2015 – indexes dropped nearly everywhere, including the TSX/S&P Composite Index, which was down by more than 300 points. The drop was fuelled by a cocktail of still-falling oil prices – currently south of $50 – and a general sense of deja vu, as renewed fears of a Greek exit spook bankers and politicians alike.

Expect the same forces to prevail today, aided or abetted by a rash of new economic data from the holiday month: growth numbers are expected for the eurozone, China and Japan – none of it expected to be particularly balmy – while manufacturing data will be out for Canada and the U.S.

On the other hand, the International Consumers Electronics Show continues today in Las Vegas, so push aside any worries by speculating on what tech gadgets could come out next. Samsung, for its part, has forecast the world will be overrun with objects with Wi-Fi, or as they called it, “the Internet of things.” Then again, your 13-year-old could have told you that. 

Oil heads south of $50 – again. This morning, West Texas Intermediate had dropped once again below US$50, after slipping below $50 yesterday but managing to finish the working day slightly above. Mid-morning, it was at US$49.51, with Brent at US$52.41, although who knows where it will be by the time you eat lunch. The drop has been caused by a powerful combination of a supply glut, an economic slowdown (although not in the U.S.) and plain old politics, and new lows have frequently surprised the markets and commentators – even when they shouldn’t have, as Maclean’s economics editor Jason Kirby reminds us. For my part, I used up all the “how low can oil go?” headlines at the $65 mark. Bad move.

As oil goes, so goes the TSX. as prices pushed the TSX/S&P composite index down 2.5 per cent, or 360.95 points, the biggest day drop in 20 months. The losses were widespread, but energy led the way. The TSX wasn’t alone – there were losses across the American markets yesterday, and the rout has continued today with Asian and European markets down across the board.

Greece is causing worry across the eurozone (and the world.) Greece’s problems never really went away – the country still has stratospheric debt and unemployment levels remain at almost 30 per cent – but the European country’s travails took a break from front pages for a while. Now, the eurozone problem child is back, as a looming national election turns markets and politicians jumpy. Leading in the polls is an anti-austerity party that pledges to end the pain for Greeks, but this could mean defaulting on loans from the EU, ECB and IMF, and subsequent fears of a “Grexit”, the pithy little name given to what is often seen as the downfall of the eurozone.

There is a lot of disagreement on how likely, as well as how problematic, this would actually be. Germany is in the centre of this debate, after Der Spiegel published a report claiming Angela Merkel thinks the eurozone could hold up without Greece. The German government has denied this report, but others have said it was a well-placed bluff directed at the potential Greek leader. Commentators, too, disagree on how bad this is: things have improved for many countries since the European debt crisis in 2009 – and, after all, the election hasn’t even happened yet – but growth is still barely there in much of the union, as the European Central Bank fights the risk of deflation and mulls over using massive stimulus to get the economy going. Numbers out today on growth should only add to this picture, as the euro itself remains at a nine-year low.

At the same time, Greece may actually be getting an unfair share of bad press: Italy and Spain are a mess, too. As Eric Reguly at the Globe notes, Italy is in recession for the third time since 2008, and its largest opposition parties want their own eurozone exit, as does a party in Spain with the largest support.

Amidst falling oil prices, North Americans love cars.  Both Canada and the U.S. broke their own records for auto sales in December. Sales broke 2013’s record for the best Christmas month on record for Canada, while U.S. dealers had their best year in eight years. The timing may seem strange – after all, the auto industry also had a record year for recalls, and, you know, climate change – but interest rates remain at record lows (and are expected to go up this year), and with oil prices so low, North Americans may be making car purchases they’ve held off for the last few years.

$100 million for the Forex scandal. The investment bank JPMorgan is the first of several banks to pay out on civil suits over claims they rigged the foreign exchange markets. It’s actually only a very small chunk of the bill so far. Six banks have had already seen bills tallying US$4.3 billion collectively by mid-November, with Citigroup and JPMorgan facing the biggest fines, at a billion each. There is likely much more to come, since the U.S. Department of Justice is still investigating. The scandal involves charges that traders at multiple banks colluded with each other to fix prices, using chat boards, messaging, and generally terrible grammar. Here’s an example of how they did it.

The ISIS economy isn’t doing well, either. The self-declared Islamic State also has economic problems, according to residents quoted in this Financial Times story. Some areas held by ISIS appear relatively orderly, but the zone requires three currencies, with massive inflation, racketeering, and income inequality: while many local salaries are still paid by Iraq or Syria, some foreign fighters earn five times as much as the locals.

Need to Know: 

TSX: 14,392.70  (- 360.95 points, 2.5 per cent), Monday
Oil (WTI): US$49.51, Tuesday morning
Loonie: 85.11 cents, Monday

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