Market volatility jumps as Great Unwinding continues

GU 13Apr15

As I have feared, major volatility is developing in financial and chemical markets, as the Great Unwinding of policymaker stimulus continues.  The chart above shows the dramatic increase in the benchmark portfolio since the Unwinding began in mid-August:

  • There was very little volatility from January until August, with prices generally remaining within +/- 10%
  • Volatility then exploded, with prices for Brent oil (blue line), naphtha (black) and benzene (green) falling 50% within a matter of weeks
  • Prices for PTA (red) in China fell 40%, whilst US export prices for HDPE (orange) fell 20%
  • The value of the Japanese yen (brown) also fell nearly 20%
  • And even though the US S&P 500 Index (purple) appears stable, it moved >1% on nearly one-third of trading days in Q1 this year – twice the volatility seen in 2014

The issue, of course, is that markets are no longer anchored by previous certainties.

They still believe central banks will never let stock markets fall – and New York Fed Chairman Bill Dudley duly rushed to support the S&P 500 last week after the weak jobs report.  But in the wider world outside stock markets, companies and investors are not so certain.  Oil markets provide a good example of the contrary views on offer:

  • Shell’s $70bn bid for BG is based on the belief oil prices will return to $90/bbl by 2017
  • The latest forecast from the US Energy Information Agency is for $59/bbl in 2015 and $70 in 2016
  • Goldman Sachs cut their forecast in January from $80/bbl to $42/bbl for 2015, and are now at $40/bbl
  • Citibank and myself both believe over-supply and weak demand will cause prices to fall below $30/bbl

BASF typify the uncertainly surrounding this key issue.  CEO Kurt Bock forecasts prices at $60/bbl – $70/bbl, but cautions that:

Oil and raw material prices are volatile, as are currencies; the emerging markets are growing more slowly; and the global economy is being damped by geopolitical conflict.”

Companies and investors clearly cannot avoid taking a view on the issue.  And the difference between the forecasts is vast in terms of future profitability.

One way to resolve this impasse might be to test strategies against the 3 Scenarios I proposed in my 2015-17 Outlook last November, Budgeting for the Cycle of Deflation.  This could help avoid the risk of an unpleasant surprise in the future.


My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Benzene Europe, down 46%. “Slight upward movement over the course of the week, with some cracker turnarounds and recent exports on benzene and pygas helping to balance out regional supply”
Brent crude oil, down 45%
Naphtha Europe, down 41%. “Activity remains low after the Easter holidays with demand for gasoline blending seen to be weak
PTA China, down 34%. “Overall polyester demand in Asia was described as largely flat, with majority of buyers sitting on ample inventories.”
HDPE US export, down 23%. “Prices held steady because of ongoing logistical problems in Houston.”
¥:$, down 17%
S&P 500 stock market index, up 8%

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