A man walks by an electronic stock board of a securities firm in Tokyo Friday, Oct. 10, 2014. Asian stocks sank Friday after Wall Street suffered its worst day of the year and weak German trade data fueled worry Europe is sliding into recession. Japan's benchmark Nikkei 225 index dropped 1.15 percent or 178.38 points and closed at 15,300.55.Koji Sasahara/The Associated Press
Another plunge in oil prices reflected the likelihood that emerging markets as well as Europe are in the grip of a slowdown, raising investors' fears that markets face a substantial correction, or worse, as the United States emerges as the sole growth engine.
On Monday, Brent crude, the effective global oil benchmark, extended its three-month rout with a 2.1 per cent fall, to about $88.30 (U.S.) a barrel. American oil prices fell by 1.2 per cent, taking West Texas Intermediate to just under $85.
Oil, like copper, is considered a fairly reliable indicator of future growth prospects. Copper futures dropped 3.25 per cent last month as oil fell, though they are up marginally since the start of October. Iron ore prices in China, another indicator of growth, are down about 30 per cent this year as Chinese growth goes from torrid to tepid.
The equity markets are as spooked as the commodities markets. The S&P 500 has lost 5.6 per cent since reaching a year high on Sept. 19, putting it about half way towards its first 10 per cent correction in three years.
The Euro Stoxx 50 index, which represents the euro zone's biggest companies, has taken a much more severe beating, as the euro zone shows signs of slipping into a deflationary recession. After a fall of almost 10 per cent since mid-September, its year-to-date performance has turned negative. Investors are withdrawing billions of euros from exchange-traded funds that track European indexes.
The European markets were up slightly on Monday after last week's sell-off, but could take another dip on Tuesday if fresh data shows that third-quarter industrial production in the 28-country euro zone fell. Economists expect a negative number. Recent production numbers "clearly confirmed that the industrial recovery across the euro zone has lost significant momentum," said ING economist Martin van Vliet.
The slowdown in Europe has been so severe – German industrial production fell 4.3 per cent in August over July and Italy is back in recession – that it may affect the timing of the Bank of England's interest rate changes. The bank is widely expected to become the first major Western bank to raise rates as Britain's growth greatly outperforms the euro zone's. "The only difficulty that is caused by Europe is that it provides an additional drag on growth," bank governor Mark Carney told CNN on Monday. "But that doesn't dictate the monetary policy of the Bank of England."
Oil prices have dropped steadily since June, when the Brent price was $115 a barrel. The slowdown in the euro zone has played a big factor in the fall-off, as have waning growth rates in the emerging markets. Speaking last week at the annual meeting of the International Monetary Fund, managing director Christine Lagarde said there was "clearly a major slowdown in countries like Brazil and Russia" and warned that the market volatility could increase once the U.S Federal Reserve winds down its quantitative easing program.
The IMF has been busy cutting global, emerging market and euro zone growth forecasts. It now puts the chances of a third euro zone recession since 2008 at 40 per cent. It is the falling growth rates in emerging markets, however, that have rattled the markets; their growth no longer seems sufficient to prevent a global slowdown. The IMF now expects China's growth rate to slip to 7.4 per cent this year and next year while Latin American growth should fall by half, to about 1.3 per cent, in 2014. Some private forecasts suggest even lower figures.
Brazil is close to recession, as is Russia, whose export earnings are getting battered by sinking oil prices. Russia has been spending billions of dollars defending the ruble, which has been on a five-week losing streak against the dollar.
The waning growth rates are bearish for oil and it does not appear that OPEC, responsible for one-third of oil output and two-thirds of oil reserves, is willing to curtail output. At least two member countries, Venezuela and Iran, want OPEC to tighten up production to push the price back to $100. Saudi Arabia, the cartel's largest producer, is sending out signals that it's willing to accept far lower prices. The question is whether the Saudis think the price will bounce back as low prices translate into higher demand, or whether it hopes a lengthy period of low prices will buy it market share by choking off some U.S. shale oil production.
The Saudis are not commenting, but on Sunday, Kuwait oil minister Ali al-Omair said that OPEC might not curtail production when the member countries meeting in Vienna on Nov. 27. "I don't think there is a chance that [OPEC] would reduce production," he told the Kuwaiti state news agency KUNA.
If growth keeps waning, driving oil prices down, OPEC may have to reconsider its stance.
Eric Reguly