US retail data suggest wealth transfer from energy producers is not working smoothly
One reason tumbling oil prices have hit global market sentiment so badly is because investors are worried about the fiscal damage being wrought upon energy-producing nations.
They need to raise money, the reasoning goes. And so, as Capital Economics notes: “The collapse in oil prices has prompted concerns that many sovereign wealth funds will be forced to liquidate their vast holdings of financial assets, putting further pressure on market prices.”
The assets of SWFs have more than doubled since the end of 2007, from about $3.5tn to $7.2tn, the result of oil prices increasing earlier in that period.
It is estimated that by the end of last year more than 56 per cent of the assets of SWFs originated from the export of oil and gas-related products, says CapEco.
If oil prices continue to fall, stock markets would remain under the cosh “as the shares of oil producers came under more pressure and concerns about deflation and the health of the global economy grew”.
Government bonds would benefit amid haven demand, lower inflation expectations, and anticipation of additional monetary easing.
What markets are forgetting is that “falling oil prices transfer income from countries that are net producers to those that are net consumers, where savings rates have tended to be lower”.
But Trading Post notes that meek US retail sales data of late, despite plunging household fuel costs — see natural gas prices — suggest this transfer mechanism is not working as smoothly as economists had hoped.
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