On the other side, the sudden sharp decline in the oil futures price from $56 (€43) on April 25 to $52.50 as at April 27, mainly on the back of a much higher than expected inventory build-up and you have a positive catalyst to help US equity markets possibly get through technical resistance and turn bullish. So something to feed both bulls and bears. The net consequence appears to be downside adjustments to mid-year GDP forecasts.
Using for reference the University of Pennsylvania’s hi-frequency weekly forecast for the US economy, released every Friday by Nobel Laureate LR Klein, the Current Quarter Model’s average forecast for growth in real GDP has just been revised downward from 3.83 per cent to 3.61 per cent and the second quarter GDP forecast to 1.02 per cent from 1.35 per cent - not a good sign!
In less febrile times, such economic statistics would not have had such an impact on equity and bond markets. But this volatility is surely a reflection on how financial markets and the US economy are moving onto ever-thinner ice. For example, the realisation that refining capacity is becoming a major bottleneck in a world where China, and shortly, no doubt, India, are rapidly industrialising, means that fears over the inflationary or deflationary impact of further oil prices changes are never far from the surface.
It now seems that, from one week to the next, we are concerned about inflation or a slow-down in consumer demand and/or investment spending. Some economists even hint at stagflation. This increases the risk environment but not the appetite for risk.
The US twin deficits are a perfect example of how unsettled markets are. While currently both are easy to finance because China and Japan manage their exchange rates against the US dollar and consequently accumulate reserves, they are nevertheless unsettling US policy makers.
This has resulted in renewed calls in the past month for the Chinese renmimbi to be revalued. If this happens, inflation will become a very real concern.
Victor Filatov, chairman, TrinityCapM
