By Peter Switzer
Want to understand the crazy complexity of stock markets? Well, absorb this one: the Turks shoot down a Russian jetfighter, oil spikes on this new potentially-scary Middle East curve ball, the oil price spikes and ahead of the closing bell on Wall Street, the Dow is up!
Something like this could have created a panic and a sell off but the positive effects on the oil price have actually helped the Dow Jones index go up, as some of the big energy companies make up the most watched stock market index in the world.
The thinking might be that if this action by the Turks results in Russian retaliation, then who knows what happens next in the region where the world’s oil supply congregates?
Both West Texas crude and Brent oil spiked higher, with the latter topping $US46 a barrel. In many ways, this price is a critical issue for companies such as Santos and BHP, who have been having share price dramas of late.
Of course, this kind of risk-driven price rise is not as good for the share prices of the companies that are in the energy sector as a rise in global demand — that’s the best scenario — but there is another possible reason for an oil price rise.
Morgan’s chief economist, Michael Knox, in the past had told me he expected the oil price to trend higher over 2016 and 2017. He even dared to mention a target such as $US100 a barrel! Now this would be a ripper for energy players’ share prices so on Monday night I asked if he still held his view and, if so, how would it happen?
His answer was yes and to this I inwardly said to myself: “Yes!” But then I needed him to prove to me that there was a good chance he’d be right. This is what he said, in a nutshell: history says when the euro is oversold as it is now, there is a turnaround, where the euro spikes and the greenback, which is overbought, starts to fall. That time, statistics-wise, is pretty close and he expects to see the start of it after the Fed raises interest rates in December and the European Central Bank again eases monetary policy, also in December.
He thinks by January that we could see this currency turnaround and when the US dollar falls, commodity prices rise, as they’re mostly priced in the greenback.
This led me to ask him the obvious stock market question: if someone bought BHP at $20 on the hope that its share price would spike within one year, would it be a dumb play?
Despite the obvious danger of answering this question, Knoxy admitted that it didn't “look like a dumb play.”
So as I thought, he would have thought: “If my currency story is right, then the US dollar falls and iron ore prices rise and that has to be good for the BHP share price.” Good thinking, Knoxy and Switz too!
Of course, BHP is also in the energy space as well as other commodities, so this greenback story is intriguing, especially as it’s based on the surprise analysis that when the Fed raises interest rates, the greenback falls. Most would expect the reverse but many economists like Knox think the US dollar has gone too high and the first rate rise, if it comes with a “we will not be rising too fast” statement, could lead to a lower greenback.
Clearly, the current Russian-Turk problem adds a new complexity to all analysis, especially if it does spook stock markets in coming weeks, which could force the Fed to hold fire on its first rate rise. However, the Michael Knox theory is worth being aware of, if you have a hefty exposure to the Big Australian — BHP.
European stock markets ended down, while the Russian market was off 3% and the Turkish bourse lost 4%, so they’re spooked!
Apart for the bad news for the Russian pilots, who apparently ejected but may have been taken prisoner by who knows who, US economic growth for the third quarter was ramped up from a first reading of 1.5% to 2.1%, which met expectations. And this comes as Black Friday looms for US retailers. This is the Friday after Thanksgiving, when US shoppers start ripping into the malls ahead of Christmas. This public holiday Friday is the day when retailers go into the black with great sales pitches to consumers. That’s why it’s called Black Friday.
This important boost to the US economy and the stock market doesn’t need a potential Russian-Turk war or even a war of words, so it’s a problem for anyone sweating on a great bull run into Christmas.
Let’s hope this can be patched up diplomatically but with Putin, he can be a tough nut to crack so expecting a measured response might be asking too much!
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