Oil prices continue to be a driving force

Next report will be published on 4th January, 2016

Outlook:

Today we get the US trade deficit, Case-Shiller home prices for Oct and consumer confidence. Home prices, despite the huge lag, are probably the most interesting. Bloomberg reports the forecast is a rise of 5.6% y/y, about the same as September (5.45%). For the previ-ous year, the rise was 4.35%, so we will still have a modest improvement. At least it’s not rabid infla-tion, nor a drop.

We are not going to ask you to suffer through a look back at 2015 or a set of predictions about next year that will almost certainly turn out to be dead wrong. At this point, it looks like oil prices will continue to be a driving force and probably to the downside, maybe even to $25. But Saudi Arabia could change its self-destructive policy or some other supply constraint could come along. Equity market analysts say further oil price drops will be negative for equities, as we have seen this year, but we confess we don’t see why. Lower energy costs should boost economic activity and put more money in various pockets, including consumer pockets, so why it’s equity-negative is a mystery.

The FT’s smart editor Authers frets today about ETF’s becoming the font of market turmoil in other are-as after we saw the junk bond ETF meltdown, but for once we wonder if Authers has it right. He usually does but at a guess, it’s excess leverage behind an Event turning into a Crisis, and we don’t have that in ETF’s, although the size alone is pretty scary ($3 trillion).

And next year will be awful for those who follow US politics. It’s embarrassing that the leading political figure today is a vulgar, crude, bigoted huckster. Other countries have their embarrassments, too (think Berlusconi), but that’s cold comfort. The other leading figure is not likeable and not trusted by a majori-ty of those polled, and besides, she’s married to Bill Clinton. Bill is a talented politician but honestly, we don’t want Hillary because of Bill and we certainly don’t want Jeb! because of W. That pretty much leaves Bernie and Chris Christie.

Going into Q1, we expect the shorter-term yields to continue to firm, data willing, and the dollar to re-cover, perhaps to the 1.0500 and parity we had expected for year-end. That scenario has not yet been killed—just delayed. And keep your hands off emerging market assets and currencies. As we have been noting all year, the EM’s are mismanaged and over-indebted in rising currencies. It cannot end well.

Holiday Schedule: This is the last morning report until Monday, Jan 4. Happy New Year!