Connect with us

Economics

Does the decline in oil prices signal a coming global recession?

The driver of this bearish sentiment has been the concern of a possible recession and an overly hawkish response by the Federal Reserve Last week, the…

Published

on

The driver of this bearish sentiment has been the concern of a possible recession and an overly hawkish response by the Federal Reserve

Last week, the crude oil markets saw one of the most significant single-day price declines in history. Have the bulls retreated – perhaps for good?

Tuesday’s oil price collapse could go down as one of the most memorable moments of the oil market’s tumultuous year, said Josh Owens in his piece for Oilprice.com. Although oil futures rose slightly on Friday, they still managed to register a weekly decline, bringing a sigh of relief to consumers.

Fears of a global recession helped bring prices down, leading some to speculate that crude markets could be in for some real battering. With central banks – including the United States Federal Reserve – hiking interest rates to tame inflation, investors seemed to already be reacting to the consequences of such a slowdown.

“A growing number of analysts feel many of the world’s leading economies will suffer negative growth in the next few months, and this will drag the U.S. into a recession,” Fawad Razaqzada, market analyst at City Index, told Bloomberg.

The biggest driver of this bearish sentiment has been the concern of a possible recession and an overly hawkish response by the Federal Reserve, said Alex Kimani of Oilprice.com. “Recession fears likely pushed some investors out of the oil trade as an inflation hedge,” Giovanni Staunovo, an analyst at UBS Group AG, told Bloomberg.

Citigroup’s Ed Morse is adding his voice to the growing chorus. Amid higher prices, the outlook for oil demand likely will see further downward revisions, he emphasized. “Almost everybody has reduced their expectations of demand for the year,” Morse told Bloomberg Television on Wednesday. “We don’t see the burgeoning demand coming out of China,” he added, noting that China has been increasing its oil stockpiles this year.

Crude oil prices may collapse to US$65 a barrel by year-end if a recession hits, Citigroup analysts say. Citigroup has already reduced its global demand forecast by about one-third, to 2.4 million to 2.5 million barrels per day (bpd). Bloomberg said this is in line with projections from the U.S. Energy Information Administration and the International Energy Agency.

But crude oil supplies continue to be tight. Russia’s war on Ukraine and its implications on global crude supply haunt the markets. And questions about Kazakhstan’s crude oil exports are rising. On Tuesday, a Russian court ordered a 30-day stoppage of the CPC Terminal, through which more than 30 million barrels of mostly Kazakh crude gets exported each month.

The court order to halt oil loadings from a Black Sea port is unnerving European crude traders, already reeling from the tightest regional market in years, sending prices for competing barrels of oil spiralling, Bloomberg reported.

In the meantime, talk of a price cap on Russian crude oil exports could prompt Russian President Vladimir Putin to play tough with the West, resulting in more tightness in the energy markets. “The most obvious and likely risk with a price cap is that Russia might choose not to participate and instead retaliate by reducing exports,” Kimani wrote for Oilprice.com.

JPM analysts say “it is likely that the Russian government could retaliate by cutting output to inflict pain on the West. The tightness of the global oil market is on Russia’s side.” Crude oil geopolitics continue to extract a price.

Bloomberg reports that the combined monthly exports of Azerbaijan, Kazakhstan, Libya, the North Sea and West – all major European crude suppliers – declined by 1.04 million bpd in June. In a market facing tight supply, a decline is a cause of concern.

Traders are also tracking China’s efforts to contain renewed COVID-19 outbreaks and enable Asia’s largest economy to reopen fully. That would bolster consumption and offset the drag from economic slowdowns in the U.S. and Europe.

“While the odds of a recession are indeed rising, it’s premature for the oil market to be succumbing to such concerns,” Goldman Sachs & Co. analyst Damien Courvalin and his colleagues said in a note.

So it seems premature to say the energy markets are bearish. Unless recession becomes entrenched and global oil demand falls drastically, the dip in prices could just be a passing phase.

By Rashid Husain Syed
Columnist
Troy Media

Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has provided his perspective on global energy issues to the Department of Energy in Washington and the International Energy Agency in Paris.

Courtesy of Troy Media

Read More

Continue Reading

Spread & Containment

How bonds work and why everyone is talking about them right now: a finance expert explains

Investor confidence in the UK is at a low, and the bond market has reacted dramatically.

Published

on

The Bank of England is buying bonds again. Just as it was about to start selling the debt it had accumulated as part of its last effort to support the economy during the COVID-19 pandemic, the central bank has been forced to announce a new scheme to shore up investor confidence.

The bank’s £65 billion short-term spree aims to address the slump in bond prices caused by investors rushing to sell after the government’s recent mini-budget. This led to a surge in bond yields that hiked borrowing costs for the government and spread to pensions, housing and the general economy. So far, it has had a limited initial impact on the markets.

We asked an expert in finance to explain what’s going on in bond markets.

What is a bond and what is the difference between bond prices and yields?

A bond is essentially a tradeable IOU. It’s a loan that investors make to issuers such as companies or governments (UK government bonds are often called gilts). A bond has a price at which it can be sold and a yield, which is an annual amount the investor receives for holding the bond, a bit like interest on a savings account, and is expressed as a percentage of the current price.

When the price of a bond falls, it signals less demand for the bond because fewer investors want to own it. At the same time, the yield rises, which represents a higher cost of borrowing for companies or governments that issued the bond because this is what they have to pay to investors.

In the days since the government’s mini-budget, yields on 10-year Treasury bonds – which are issued by the UK government – increased from approximately 3.5% to 4.52% – the highest since the 2007-2008 global financial crisis. The expectation of continued increases prompted the recent intervention by the Bank of England.

UK government 10-year bond yields

United Kingdom 10-year bond yield. Investing.com / Tradingview

What causes bond yields to move?

To understand this, it is important to bear in mind that, while people often talk about the interest rate, there are actually a number of rates. This includes the rate at which the central bank lends to commercial banks (the base rate), the rate that banks lend to each other (the interbank rate), the rate that the government borrows at (Treasury yields) and the rate at which households and firms borrow (commercial loans and mortgages).

When the Bank of England changes the base rate, this cascades through all these rates. As such, the Bank of England carefully considers the state of the economy – that is, growth and inflation – when deciding on the base rate.

When an economy is growing, interest rates and bond yields tend to rise. The occurs for several reasons. Investors sell bonds to buy riskier assets with better returns. Firms and households also look to borrow more money in a growing economy, for example, to invest in new machinery or to move home. More demand for borrowing means lenders can charge higher interest on their loans.

Higher inflation often accompanies economic growth because of the increase in demand for goods and services. This tightens supply and causes prices to rise (including wages for labour). The Bank of England, which is mandated by the government to try to keep inflation as close to 2% as possible, will respond to higher inflation by raising base rates, which, as noted, feeds through to the different rates.

Investors will often anticipate the increase in base rates and look to act before it goes up by selling Treasury bonds and buying alternative, higher return, assets. This causes bond yields to rise further. As a result, the Treasury bond yield is often seen as a predictor of future Bank of England base rate changes.

So, if yields are rising, does this mean that investors are expecting future economic growth in the UK?

No, not at the moment. When the government raises money by issuing bonds, it does so over a range of time periods (called maturities), from one day to 30 years. When an economy is expected to grow, the yield on longer-term bonds will be higher than the yield on shorter-term bonds.

This relationship between yields across different maturities is referred to as the term structure or yield curve. An upward sloping yield curve implies a growing economy. At the moment, the UK yield curve is flat, or even downward-sloping across some maturities. My research shows that a falling yield curve is a good predictor of a coming recession.

Yield curve for UK government bonds

Line graph showing downward-sloping yield curve for UK gilts
UK gilts 40-year yield curve. *The curve on the day of the previous MPC meeting is provided as reference point. Bloomberg Finance L.P., Tradeweb and Bank of England calculations

It’s important to remember that these different yields act as a benchmark for commercial lending rates of equivalent lengths. The approximate jump to 4.5% in 2-year and 5-year yields has been reflected in mortgage rates, which is why some lenders have pulled available mortgage deals recently while they reassess the lending rates charged to households.


Read more: Is the UK in a recession? How central banks decide and why it's so hard to call it


But if the UK economy is not expected to perform well, why have bond yields been rising after the chancellor’s mini-budget announcement?

The rising bond yields we are seeing relate to an additional factor: the amount of government debt. The mini-budget introduced tax cuts and increased spending and investors know the government will need to increase borrowing to meet these commitments. Some estimates put potential government borrowing at £190 billion due to this plan.

An increase in the amount a homeowner borrows versus the value of their home (called the loan-to-value) causes the mortgage rate charged to the borrower to rise. Similarly, an increase in the amount of bonds that the government will be looking to sell (the amount it wants to borrow) will push down the price of existing bonds, increasing yields. More importantly, more debt without growth raises the risk level of the UK economy.

Anticipating this, investors triggered a large-scale bond sell-off after the government’s mini-budget announcement. This contributed to the fall in the value of the pound as investors selling UK Treasury bonds bought US bonds instead, essentially swapping pounds for dollars.

So will the Bank of England’s plan work?

The intervention will have a short-term positive impact, which started as soon as it was announced. But the bank is really only buying time. Any ultimate success depends on the government restoring investor confidence in its economic plans.

Unfortunately, rising yields and borrowing costs for the UK economy is the price we are now paying for the government’s recent fiscal announcement.

David McMillan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

Read More

Continue Reading

Economics

Wyshbox Life Insurance study shows how the pandemic, inflation and looming recession has led to women worrying about their financial future.

Wyshbox Life Insurance study shows how the pandemic, inflation and looming recession has led to women worrying about their financial future.
PR Newswire
MILWAUKEE, Sept. 29, 2022

Through interviews and surveys of over 400 working women between the …

Published

on

Wyshbox Life Insurance study shows how the pandemic, inflation and looming recession has led to women worrying about their financial future.

PR Newswire

Through interviews and surveys of over 400 working women between the ages 20-45 years, the numbers aren't good for how women feel about their financial future.

MILWAUKEE, Sept. 29, 2022 /PRNewswire/ -- It's no surprise that women have had to deal with unprecedented volatility over the past few years. The (financially) unprotected sex by Wyshbox Life Insurance includes interviews and surveys of over 400 women and takes a deep dive into how much of a negative financial impact the pandemic, inflation and fears of a potential recession in the future has had on women of different ages and cultural backgrounds. We've discovered that 83% of women surveyed worry about high inflation in the future, which has increased their household expenses and has had a negative effect on their purchasing power. Shockingly, the biggest worry for women of color (35% surveyed) is that their wages are not keeping pace with rising expenses, a worry not shared as strongly by caucasian women.1

New study shows how the pandemic, inflation and looming recession has women worrying about their financial future.

Found on our website at www.wyshbox.com/women, The (financially) unprotected sex white paper not only seeks to understand the emotional and financial burdens and worries of women of different racial backgrounds, but also their employment and childcare struggles when compared to men.

"An eye-opening learning we found was that 30% of caucasian women versus 42% of women of color had to quit their job over the pandemic," says Hetal Karani, Senior Strategist who led the research effort for Wyshbox. Those who had quit the workforce cited pursuing higher education opportunities, limited childcare availability and a lack of alternative schooling options as their main reason to exit the labor market—in addition to not wanting to risk their family's health after being denied remote working options by their employer.1 

Coupled with the importance of a mother's salary and a steep rise in dual income households, we found these learnings particularly troubling. "More than 70% percent of households with children under 18 years rely on the woman's salary, and 40% of moms are the primary breadwinner for the home,"1 added Hetal, "yet our emphasis on the importance of financial planning for the well being of women and their families has remained stagnant"

And when it comes to protecting their future, 70% of mothers said they were worried about what would happen to their families if they passed away.2 So it was no surprise that Wyshbox Life Insurance saw an unprecedented level of women applying for Life Insurance, well above the historical average. Applicants were looking to protect their children and spouse should they lose their salary unexpectedly, cover their mortgages to protect their family from losing their home pay out to a college tuition that they have been saving for.

Read The (Financially) Unprotected Sex white paper for insights and actionable takeaways for not only the insurtech industry, but for anyone looking to understand how women are taking on the new challenges in front of them.

About Wyshbox

Wyshbox life insurance is there to help make sure that life post-you is everything you want it to be. Wyshbox provides term life insurance tailored to everyone's specific needs with policies that can help take care of your family, kids, pets, friends, funeral arrangements, and so much more. It takes less than 10 minutes, is 100% online, and plans start at just $9 per month.

Media Contact:
media@wyshbox.com

Copyright © 2022 Wysh Life and Health Insurance Company
*Disclosures at: www.wyshbox.com/ad-disclosures 

1 Wyshbox Life Insurance. Quantitative Survey "Women during COVID and Recession". 400 participants. August 8, 2022
2 Wyshbox Life Insurance. Quantitative Survey "Thematic Survey". 1200 participants. November 2021

View original content to download multimedia:https://www.prnewswire.com/news-releases/wyshbox-life-insurance-study-shows-how-the-pandemic-inflation-and-looming-recession-has-led-to-women-worrying-about-their-financial-future-301636835.html

SOURCE Wyshbox

Read More

Continue Reading

Economics

EasyJet share price has collapsed by 53% in 2022. Is it a buy?

The EasyJet (LON: EZJ) share price has hit turbulence as concerns about demand and soaring costs remain. It dropped to a low of 293p, which was the lowest…

Published

on

The EasyJet (LON: EZJ) share price has hit turbulence as concerns about demand and soaring costs remain. It dropped to a low of 293p, which was the lowest level since November 2011. It has plummeted by more than 82% from its all-time high, giving it a market cap of more than 2.5 billion pounds.

Is EasyJet a good buy?

EasyJet is a leading regional airline that operates mostly in Europe. It has hundreds of aircraft and thousands of employees. In 2021, the firm’s revenue jumped to more than 1.49 billion pounds, which was a strong recovery from what it made in the previous year.

EasyJet’s business is doing well as demand for flights rises. In the most recent results, the firm said that forward bookings for Q3 were 76% sold and 36% sold for Q4. For some destinations, bookings have been much higher than before the pandemic.

EasyJet’s business made more than 1.75 billion in revenue in the first half of the year. This happened as passenger revenue rose to 1.15 billion while ancillary revenue jumped to 603 million pounds. The firm managed to make a loss before tax of more than 114 million pounds. It attributed that loss to higher costs and forex conversions.

As I wrote on this article on IAG, EasyJet share price has collapsed as investors worry about the soaring cost of doing business. Besides, jet fuel and wages have jumped sharply in the past few months. Also, analysts and investors are concerned about flight cancellations in its key markets.

Still, there is are two key catalysts for EasyJet. For one, as the stock collapses, it could become a viable acquisition target. In 2021, the management rejected a relatively attractive bid from Wizz Air. Another bid could happen if the stock continues tumbling.

Further, the company could do well as the aviation industry stabilizes in the coming months. A key challenge is that confidence in Europe and the UK.

EasyJet share price forecast

EasyJet share price

The daily chart shows that the EasyJet stock price has been in a strong bearish trend in the past few months. During this time, the stock has tumbled below all moving averages. It has also formed what looks like a falling wedge pattern, which is usually a bullish sign.

The Relative Strength Index (RSI) has dropped below the oversold level while the Awesome Oscillator has moved below the neutral point.

Therefore, in the near term, the stock will likely continue falling as sellers target the support at 270p. In the long-term, however, the shares will likely rebound as the falling wedge reaches its confluence level.

The post EasyJet share price has collapsed by 53% in 2022. Is it a buy? appeared first on Invezz.

Read More

Continue Reading

Trending