WHAT has gotten into the world’s stock markets? This week saw bourses around the globe reach their highest levels since the dark days of 2008.
The Dow Jones hit a record high while the more representative S&P 500 was just a few points off its October 2007 peak. The prevailing sentiment is risk-on wherever you look. Nothing seems to be getting in the way of a punt – be it the inconclusive Italian elections, scary nuclear sabre-rattling by North Korea, or the European Centre Bank turning dovish unexpectedly.
True, there is good news in the real economy that might have contributed to this rise. China’s exports are up 21 per cent year-on-year, suggesting a rebound from last year when the bellwether economy registered its weakest growth in 13 years.
In America, despite persistent budget wobbles, the economy is maintaining momentum. Yesterday’s payroll figures showed the US economy gained an extra 236,000 jobs in February – well above expectations.
However, the key contributor to the mini bull market is the decision by central banks to keep the monetary taps on at full flood and depress interest rates. The US Federal Reserve is buying bonds to the tune of some £55 billion a month and says it will go on doing so until American unemployment is below 6.5 per cent. Japanese printing presses are also working overtime in a bid to depress the value of the yen.
From this perspective, the odd men out are the monetary authorities in the UK and the eurozone. On Thursday, the Bank of England again held back on further quantitative easing despite commercial bank loans contracting by £3bn in the last quarter of 2012. The European Central Bank held interest rates at 0.75 per cent despite a further weakening in German manufacturing. Any loss of nerve by the ECB could easily trip market sentiment back towards the pessimistic.
We need to remember that stock market conditions are very different from the bull run before 2007. Price-to-earnings ratios are well down and ultra-low interest rates are driving investors out of the bond market. These conditions may not last, especially if inflation takes a grip.
What we are experiencing is a short-term rally because equities are the only game in town. All such rallies are fickle.
Brent price predictions could benefit Swinney
The political heather was well and truly alight this week following the leak of an SNP cabinet paper by John Swinney.
This seemed to suggest North Sea oil revenues would not be sufficient to pays the bills after independence. The paper quoted oil revenue estimates by the Office for Budget Responsibility (OBR) based on a price of $100 a barrel. Currently, it’s hovering around $110.
No problem, says Swinney, oil will go higher. Now comes a bombshell from the OECD, official think tank of the main Western industrial economies, which claims the price of Brent crude could hit $200 by 2020, and certainly lie in the range $150-$250.
Reason: once the slowdown caused by the 2008 financial crisis is over, exponential growth in the developing economies will boost primary energy demand ahead of supply.
My guess is that $200 is much too high – the global economy would certainly stall long before that price was reached. However, a long-run price between $120 and $150 is eminently possible.