LF: RBS cries 'sell everything' as deflationary crisis nears

Title: RBS cries 'sell everything' as deflationary crisis nears
Source: UK Telegraph
URL Source: http://www.telegraph.co.uk/finance/ ... deflationary-crisis-nears.html
Published: Jan 11, 2016
Author: Ambrose Evans-Pritchard
Post Date: 2016-01-12 08:46:16 by cranky
Keywords: None
Views: 1392
Comments: 9

RBS has advised clients to brace for a “cataclysmic year” and a global deflationary crisis, warning that major stock markets could fall by a fifth and oil may plummet to $16 a barrel.

Brent oil prices will continue to slide after breaking through a key technical level at $34.40, RBS claimed, with a “bear flag” and “Fibonacci” signals pointing to a floor of $16, a level last seen after the East Asia crisis in 1999. The bank said a paralysed OPEC seems incapable of responding to a deepening slowdown in Asia, now the swing region for global oil demand.

Morgan Stanley has also slashed its oil forecast, warning that Brent could fall to $20 if the US dollar keeps rising. It argued that oil is intensely leveraged to any move in the dollar and is now playing second fiddle to currency effects.

RBS forecast that yields on 10-year German Bunds would fall time to an all-time low of 0.16pc in a flight to safety, and may break zero as deflationary forces tighten their grip. The European Central Bank’s policy rate will fall to -0.7pc.

US Treasuries will fall to rock-bottom levels in sympathy, hammering hedge funds that have shorted US bonds in a very crowded “reflation trade”.

RBS first issued its grim warnings for the global economy in November but events have moved even faster than feared. It estimates that the US economy slowed to a growth rate of 0.5pc in the fourth quarter, and accuses the US Federal Reserve of “playing with fire” by raising rates into the teeth of the storm. “There has already been severe monetary tightening in the US from the rising dollar,” it said.

It is unusual for the Fed to tighten when the ISM manufacturing index is below the boom-bust line of 50. It is even more surprising to do so after nominal GDP growth has fallen to 3pc and has been trending down since early 2014.

RBS said the epicentre of global stress is China, where debt-driven expansion has reached saturation. The country now faces a surge in capital flight and needs a “dramatically lower” currency. In their view, this next leg of the rolling global drama is likely to play out fast and furiously.

“We are deeply sceptical of the consensus that the authorities can ‘buy time’ by their heavy intervention in cutting reserve ratio requirements (RRR), rate cuts and easing in fiscal policy,” it said.

Mr Roberts said the tightening cycle by the Anglo-Saxon central banks is already over. There will be no rate rises by the Bank of England before the downturn hits, and the next action by the Fed may be a humiliating volte-face and a rate cut.

RBS is not alone in fearing trouble. UBS issued what it called a “significant change” to its house view late last week, saying policy chaos in China had unsettled markets. It cut exposure to equities from overweight to neutral on a “six-month tactical horizon”. It went underweight emerging markets.

UBS said it is a precautionary move, insisting that the current global credit cycle has not yet peaked. Low oil prices should ultimately feed through to higher consumer spending and boost growth.

Larry Summers, the former US Treasury Secretary, said it would be a mistake to dismiss the current financial squall as froth. Markets often sense a gathering storm when policy-makers are still asleep at the wheel. He has long argued that the world economy is so far out of kilter that it takes permanent financial bubbles to keep growth going, an inherently unstable structure.

Yet there is something strange about the latest events. Austerity is finally over in Europe and fiscal policy in the US this year will be expansionary.

China’s slowdown hit its bottom in June and a fitful recovery has been building, driven by extra budget spending and credit growth. While the composite PMI indicator for manufacturing and services slipped back last month, it is still higher in the summer.

David Owen, from Jefferies, said there is a “weird disconnect” between the economic fundamentals and the market malaise.

“There is no evidence of anything rolling over in the US. Europe is clearly recovering and the M3 money supply in Germany is growing at almost 10pc, which normally means stronger activity,” he said.

Bank of America said panic selling had triggered its “contrarian buy signal”, since 88pc of global equity indexes are now trading below their 200-day and 50-day moving averages. The "Bull & Bear" index is at an ultra-negative level of 1.3.

It said a “big tradable multi-week rally awaits” but requires catalysts, above all a stabilisation of the Chinese yuan and oil, better PMI data and a halt to the rising dollar.

The risk is that this market storm drags on long enough to hit investment, regardless of what the economic data should imply. At the end of the day, market psychology can itself become an economic "fundamental".

Pessimists warn that unless there is a batch of irrefutably good data from China over the next two or three months, the sell-off could become self-fulfilling and quickly metamorphose into the next global crisis.

Not to worry, jsut go buy that powerball ticket and pick up a six pack of BudDumber a pizza and a new 200 inch wall hung tv, turn on your cable and let the world go by while you search 2,000 stations, while saying "Hell there ain't nuthin on"

There are three kinds of people in the world: those that can add and those that can't

The surest indicator I can think of for near-term economic gains or losses is the scrap metal market. Industries all over the world MUST buy up scrap steel,copper,brass,aluminum,etc,etc,etc starting a few months ahead of their projected manufacture and sales time in order to have time to process the scraps and turn it into new items to sell.

Scrap steel fell to a dollar a hundred pounds maybe 3 or 4 months ago,and that's where it still is. A couple of the local scrap yards have closed down and not buying any scrap at all now,and at least one has gone out of business. There is only 1 I am aware of that is still buying scrap steel,and they are still paying 1 dollar per hundred and stacking it high while waiting for the market to come back. They can get away with this because their scrap yard is situated on farm land that has been in that family and paid for for over 200 years,and they still have income coming in from farming as well as NOT farming.

Granted,this is normally the time of year when scrap prices drop as manufacturers are cutting back to reduce their inventory taxes and because this is traditionally the time of year when consumers are spent out from Christmas and the tax season,but if scrap steel prices don't start rising by late Feb,it's going to be a financially ugly year for a lot of people whose income is dependent on factory jobs or dividends.

The only thing that has kept the scrap market going the last few years has been Chinese manufacturing. China pretty much quit buying scrap a couple of months ago,and haven't started placing any orders yet.

Why is democracy held in such high esteem when itâ€™s the enemy of the minority and makes all rights relative to the dictates of the majority? (Ron Paul,2012)

American Indians had open borders. Look at how well that worked out for them.

Bob,the people you are describing might as well do as you suggest because THEY are NOT the people playing the stock market of lending money to businesses. They are just cogs in the machine that are along for the ride.

Why is democracy held in such high esteem when itâ€™s the enemy of the minority and makes all rights relative to the dictates of the majority? (Ron Paul,2012)

American Indians had open borders. Look at how well that worked out for them.

That's the price of crude oil after it's been taken from the ground. At 42 gallons per barrel, that's 38 cents per gallon. Total State and Federal Taxes (national average) is 48 cents per gallon.

You also need to include federal and state royalties and production taxes. A well hushed dirty little secret is that both the Federal and State governments make more on the production, refining and sale of a barrel of domestic oil than the oil companies that explore, develop, produce, refine and market it.

God's solution: Every 7 years the poor are released from all of their debt, and every 50 years all debt is cancelled.