Strikes on Saudi oil facilities has caused markets to rethink the current series of positive days we have seen. With 5% of global supply put out of action, the estimates of get the production back to full capacity is still unknown (estimates are a few week or a few months). This is having the obvious effects of hitting airlines and seeing a move to rick off plays. How will this change the longer term investment landscape? That will depend on political reactions.
The US is looking to open its strategic reserves and many analysts think the supply of oil can cover the outage until the Saudi plant is back online. The price of oil will probably not fall significantly from here but there are few reasons to see a large spike in price based on supply. Politically, this would be where some adjustments in the portfolio might need action.
There are already talks of the Iranian government being behind the attacks, claimed by Houthi rebels. Some in the US suggest it was even a cruise missile from Iran itself that is responsible for the strike. These allegations, should they come true, will be of greater importance to the overall price movement of oil and the overall markets. Having the threat of war hanging over consumers and companies while the economy is already slowing down in many countries could be the impetus to bring about an actual recession. It isn't a disruption in oil that will affect your portfolio as much as a disruption in confidence.
A good day in the markets on the back of positive service numbers out of Europe and more signs that Brexit will be delayed.
The defection of MPs from British prime minister Boris Johnson is causing relief in European equities because of the prospects of a Brexit delay coming as a result. Johnson wants to leave the union at the end of October "come what may" which has seen the Pound and British equities drop over the past month.
The Services numbers coming out of mainland Europe were optimistic (with exception to Italy) which will not likely stop the cutting of the rates and easing by the ECB, but could support a more measured approach over time. The real success of the stimulus program will come from the Eurozone members ability to coordinate fiscal with monetary stimulus. In the past this has been difficult with core countries like France and Germany resisting deficits to boost spending. With Germany suffering from a the slump in trade and France having a government with a pro integration leader, there is opportunity to avoid a downturn.
From an investment standpoint this is good news for long term buyers that there is more potential coordination than we have seen in the past slowdown. The fact that there will still be cuts, and the majority of the heavy lifting done by the ECB in the interim, it might be a bit early to look at certain stocks like the banks (see last post). Buying into any dip will not be as risky so long as the countries of in the Eurozone (notable Germany) start to warm towards fiscal stimulus and work together.
German elections have shown promising results for the mainstream parties already in power (CDU and SPD) but also saw more gains from the anti immigration party (the AFD). This comes at a time when the German economy has contracted in the second quarter and could enter a recession in the 3rd. This is in contrast with France who has seen their economic numbers beat expectations over the summer. This trend in Germany underperforming and France being resilient is due primarily due to the fact that the German economy is heavily reliant on exports while the French economy has a good portion of internal demand.
Longer term, this could prove to be a good thing. In the past when the eurozone was slowing down, the lack of unity on what action to take to stimulate a 2 speed Europe caused austerity to be the only viable option. This was due to the core countries not wanting to subsidize stimulus for the periphery countries. Now that Germany is in the same boat and in need of more stimulus, there could be more direction on the French president's desire to integrate the Eurozone economies more. This unification of fiscal stimulus will allow the euro to become more competitive against the US and China as they start to build a more unified economic model.
If these changes occur it will help to stem the negative yielding debt we have seen in countries like Germany as their credit worthiness is coupled together with Italy, Spain, and other countries. As these levels of debt rise, and inflation starts to take hold, we would see a gradual rise in the yield curve across many countries. This would most benefit the banks in the countries as they will have the ability to lend at profitable rates. With the book value of some of these banks at steep discounts, there could be some longer term buys in play. A rush into the market is not needed to gain on these opportunities as the ECB is looking at more rate cuts and stimulus to boost growth. If we get the old core countries like Germany to start looking at fiscal stimulus however, we could be at a good buying point.