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As oil prices ventur to levels not seen in over five years, the energy space is predictably the hardest hit, seeing indiscriminate selling across the board. While the initial problem was the fact big oil producers such as Saudi Arabia were reluctant to cut production, it now seems nations hurt by the oil price drop have resorted to ramping up supply to make up for the lost revenue.
This has been evident from the likes of Russia and Iraq, which is now bringing about fears of a glut. Other nations like Kuwait are said to be eyeing a significant hike in utilities prices in an attempt to raise revenue.
Recent stability in oil prices had seen some investors start to call a bottom but the latest move will have some rethinking this theory. From June highs, oil is down around 48% and focus will be on large oil-exporting nations and the impact this will have on their currencies.
The Canadian dollar, for example, is heavily correlated to oil prices and has lost significant ground. The other G10 currency that has struggled significantly has been the Norwegian Krone, which has seen the most outflow to the greenback in the G10 space over the past week.
With investors fairly risk averse, safe haven flows have returned to the market with the yen being the biggest beneficiary in the FX space.
Europe in for a slight recovery
Being a net importer of oil, the Eurozone should have been a beneficiary of this drop in oil prices but things are a little complicated for the region at the moment. Bond yields started drifting higher yet again, sparking panic in equities, with some hefty drops for the periphery. DAX, CAC, MIB and IBEX all dropped over 3%.
To make matters worse, German CPI fell short. At a time when everyone is panicking about Greece, no one really wants to see further economic challenges. Weaker oil prices are also triggering deflationary fears for Europe.
Leaders have started talking about the risks around a Greece euro exit and there are still plenty of questions around Merkel being comfortable with Greek exit. Following yesterday’s sharp falls, we are calling the major bourses relatively flat to a touch firmer at the open.
However, choppy trading is likely to continue, particularly with Greece, Italy and Spain closed for Epiphany Day. On the calendar, we have services PMIs for Europe and the UK while the BoE releases its credit conditions survey.
Energy space weighs on ASX 200
The ASX 200 never really had a chance today after the carnage we had seen through European and US trade. The action has been concentrated in the resources space where energy and materials names have led the losses.
The slump in oil prices resulted in renewed selling in the likes of Santos, Oil Search and Woodside. All these stocks are down well over 5% and, apart from Woodside Petroleum, most of the main energy names need an oil price of at least US$50/bbl to keep EPS growth ticking along.
Gold and silver stocks have been an exception as the two precious metals enjoyed some safe haven buying interest. This has benefitted related stocks such as Newcrest, Resolute Mining and Northern Star. There has been some profit taking in financials after recent gains took the likes of Commonwealth Bank of Australia to record highs.