Correlations between in market volatility and oil price raise concern

January 25, 2016

It was another unstable week for financial markets. While we finished the week up, during the week, the FTSE 100 fell to a level not seen since November 2012. Global equity markets have been increasingly tracking the movements in the oil price. Oil and commodity companies make up a large proportion of equity indices, and investors have become increasingly concerned with prices at this level as they increase the level of investment risk. Oil companies’ dividends may come under pressure, and reserves valuations may be significantly cut. This could potentially cause debt problems, with banks and bondholders unwilling to refinance on previous terms. There are also fears that a low oil price will cause a deflationary spiral for the global economy, causing additional problems for companies and governments.

Elsewhere, Chinese GDP came in at 6.9% for Q4. This is a shade lower than the 7% target that the Chinese authorities have set. Broadly this has been seen as a more sustainable level of growth for the longer term. However, there is speculation that the data has been “smoothed” to reflect a better picture and the Chinese economy is actually growing at a slower pace. While this may be true, there is a broad consensus that the rate of growth is still firmly positive, although there is now a greater risk of a hard landing where growth slows more rapidly, or China enters a recession.

UK inflation for December was also announced last week, with CPI coming in at 0.2%, up from 0.1% in November. The rise was mainly driven by an increase in air fares and partially offset by falls in alcohol, tobacco and food. A trend of rising inflation may provide some pressure for the Bank of England to increase interest rates, however, with inflation at such a low level there is some way to go, and they will want to see an embedded trend before taking action.

Index Open Close Change % Change
FTSE 100 5804 5900 96 1.65%
S&P 500 1880 1906 26 1.38%
Dax 9545 9764 219 2.29%
Cac 40 4210 4336 126 2.99%
Nikkei 225 17147 16958 -189 -1.10%
UK 10 Year Gilt Yield 1.699 1.684 -0.015 -0.88%

The Federal Reserve will announce its January interest rate decision and Japan will release inflation and unemployment data over the coming week.

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