Why the global economy is taking a turn for the worse
What a difference a couple of weeks make.
One of the best hedge fund trades of the year had been to go long on oil and short the banks and it paid off handsomely. Buying Nymex oil from 1 January until 11 July would have produced returns of 50 per cent and simply selling the DJ Stoxx bank index over the same period would have netted another 37 per cent.
But in the last two weeks those two trends reversed. The oil price fell 14 per cent and the DJ Stoxx bank index was up some 13 per cent. The question now is which trend is likely to prevail over the coming months?
Banks Galore
We’ll get more insight into British banks this week with results from HBOS and Lloyds TSB and if reaction to earnings from their counterparts in America and Europe are anything to go by then we could see some relief that our worst fears haven’t been realised. But the upside for this bank bounce from technically oversold levels could be limited because, although we’ve priced in credit issues, the real economic slowdown is just getting into its stride.
Retail sales last week posted their biggest monthly fall since the ONS started measuring this series back in 1986. More analysts that I speak to are also now starting to side with David Blanchflower, member of the Bank of England’s rate setting team. He’s consistently voted for rate cuts all year and is now talking about the possibility of three or even four consecutive quarters of negative growth. In that scenario you can expect rising indebtedness and more corporate failures, hardly an environment in which bank earnings can outperform.
As for oil, it’s increasing demand from emerging markets that’s more than counteracted any slowing demand from the West. But perhaps that’s about to change. Germany’s IFO institute suggests the export drivers of the Germany economy might be starting to slow, an important signal because these are the companies tuned into the global growth story in Asia.
If they’re seeing slower growth then that would represent weaker demand in the boom economies and demand for oil will moderate, perhaps justifying the price falls in the last few weeks.
All of this means that the great trade is over and the reverse won’t work. Hedge funds will have to work out another wheeze for the second half of the year.
Ross Westgate co-anchors Worldwide Exchange each weekday morning on CNBC.
