Global stock markets are at risk from a spike in oil prices which could derail the fragile economic recovery and lead to a major correction in share prices, warns Steen Jakobsen, chief economist at Saxo Bank.
Geopolitical risk has increased sharply following the events of last week, a point that has been largely ignored by the ever panglossian global equity markets that march on upward.
At this point I'll hand over to the analysis by Mr Jakobsen: "The simplest way to 'measure' geopolitical risk is to look at the price of energy. Energy is everything for a macro economist as it is a tax on the economy when high, and a discount when low.
"The way I measure this geo-political risk is through measuring the spread between the 5th contract of the WTI Crude and the first contract. Of course, there are other factor workings, but lacking a better alternative, it is what I use."
"As can be seen since July 15th the 'war premium' or more neutral 'disruption premium' have increased by $2 - world consumers are now paying $2 more per barrel of WTI Crude.
Overall there are many factors influencing the crude market but the price of energy remains the one component we need to know is stable and preferably falling.
"The overall impact from war is negative despite the glorified analysis of how World War II stopped the recession – think of the 1970s – probably a better and more relevant analogy to today’s trouble in Gaza, Iraq, Russia/Ukraine, Libya, and Syria.
Many will argue it is different this time, and back then we were too dependent on the Middle East! Sure, but prices were only between 10 and 25 US Dollars!"
"The signal from the energy market about the demand of energy and the risk of getting enough of it is clear: prepare for less growth, less certainty and more geopolitical risk.
The market, however, maintains a steady hand: Israel will be contained inside a couple of weeks; Russia vs. Ukraine will find a solution… the denial of tail-risk (Black Swans) is clear for everyone to see.
A market is 'perfect' in its information, zero interest rates will save us and we have all been duped into believing that the real world no longer matters.
"The escalation of turmoil in the world is yet to play a role for the market, but be warned: everything economic has a delayed reaction of nine to twelve month – where there is an action there will be a reaction – if the present state of alertness continues through the summer you can bet on higher energy prices having a serious impact not only on world growth but also on markets."
While the markets as ever effect our daily lives there is always something more important to remember and Mr Jakobsen reminds of that in a salutary finish:
"The real losers, however - let’s remind ourselves - are the individual families losing loved ones. Camus got it right. There is nothing worth killing for, but plenty to fight for."
telegraph.co.uk
Geopolitical risk has increased sharply following the events of last week, a point that has been largely ignored by the ever panglossian global equity markets that march on upward.
At this point I'll hand over to the analysis by Mr Jakobsen: "The simplest way to 'measure' geopolitical risk is to look at the price of energy. Energy is everything for a macro economist as it is a tax on the economy when high, and a discount when low.
"The way I measure this geo-political risk is through measuring the spread between the 5th contract of the WTI Crude and the first contract. Of course, there are other factor workings, but lacking a better alternative, it is what I use."
"As can be seen since July 15th the 'war premium' or more neutral 'disruption premium' have increased by $2 - world consumers are now paying $2 more per barrel of WTI Crude.
Overall there are many factors influencing the crude market but the price of energy remains the one component we need to know is stable and preferably falling.
"The overall impact from war is negative despite the glorified analysis of how World War II stopped the recession – think of the 1970s – probably a better and more relevant analogy to today’s trouble in Gaza, Iraq, Russia/Ukraine, Libya, and Syria.
Many will argue it is different this time, and back then we were too dependent on the Middle East! Sure, but prices were only between 10 and 25 US Dollars!"
"The signal from the energy market about the demand of energy and the risk of getting enough of it is clear: prepare for less growth, less certainty and more geopolitical risk.
The market, however, maintains a steady hand: Israel will be contained inside a couple of weeks; Russia vs. Ukraine will find a solution… the denial of tail-risk (Black Swans) is clear for everyone to see.
A market is 'perfect' in its information, zero interest rates will save us and we have all been duped into believing that the real world no longer matters.
"The escalation of turmoil in the world is yet to play a role for the market, but be warned: everything economic has a delayed reaction of nine to twelve month – where there is an action there will be a reaction – if the present state of alertness continues through the summer you can bet on higher energy prices having a serious impact not only on world growth but also on markets."
While the markets as ever effect our daily lives there is always something more important to remember and Mr Jakobsen reminds of that in a salutary finish:
"The real losers, however - let’s remind ourselves - are the individual families losing loved ones. Camus got it right. There is nothing worth killing for, but plenty to fight for."
telegraph.co.uk
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