Fourteen days in December will dictate the outlook of global markets as Britian prepares to go to war
Fourteen days in December will decide the fate of world markets as first the European Central Bank followed by Opec and then the US central bank gather to take landmark decisions on policy. The meetings will dictate the flow of trillions of dollars and could mark the most significant shift in policy for a decade.
As British politicians prepare to vote on military intervention in the Middle East for the second time in two years and world leaders meet in Paris to try to save the planet, the real power brokers will gather behind closed doors.
Europe reaches for the bazooka
Hounded by deflation in the eurozone area, the ECB President, Mario Draghi, is widely expected to ramp up the quantative easing programme. Worries about falling prices prompted the ECB to unveil a €60bn (£44bn) a month quantitative easing package at the start of the year.
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The Draghi plan mobilized the ECB as lender of last resort and led to a spectacular fall in borrowing costs across the EMU periphery, buying nine months of financial calm AFP
Opec tightens its grip
The Opec group of oil-producing countries has exerted a vice-like grip on energy prices for more than half a century. Under the stewardship of the kingdom of Saudi Arabia, the world’s oil-rich states will decide whether to continue their price war.
The group will assemble on Friday December 4 to decide their production levels, and in effect set the direction of oil prices for the year ahead, and perhaps a generation.
The aircraft crashed in the Kizildag region of Turkey's Hatay province Anadolu Agency/Getty Images
Global commodity markets have been shaken to their core during the past 12 months by the actions of a small cabal of oil-rich states. In Vienna just over a year ago, the Opec nations sent shock waves around the world when they launched a price war by ramping up oil output to crush rival producers. The move brought the curtain down on an era of elevated oil prices.
The price of the industry benchmark, Brent crude, has more than halved to $45 per barrel, from $115 in June last year.
The impact on the oil-producing industry has been staggering. Investment in projects has been cut by $220bn (£140bn) according to energy consultant Wood MacKenzie.
In the North Sea alone it estimated 65,000 jobs have already been lost and globally the number is more than four times that. Moreover, the UK tax take from oil producers has collapsed by 94pc from £2.2bn last year, according to the latest figures from the Office for Budget Responsibility. This may only be the beginning.
It is estimated £40bn will have to be spent removing redundant platforms and pipelines as well as plugging spent oil wells Alamy
Higher-cost producers investing in areas such as US shale and North Sea oil have tried everything from increasing output to cutting costs to the bone in a desperate bid to stay alive. But even that might not be enough.
The Saudis seem determined to press on with the strategy. They have good reason to, of course. What is at stake is control of the most lucrative energy market in the world for a generation.
If oil is $100 per barrel then renewable energy, shale, oil sands and nuclear power generation are viable alternatives. With oil at $50 a barrel, it is cheap enough to be the only game in town. Lower prices will also cripple the development of rival producers in Iran and Russia, delaying their growth for decades.
Saudi Arabia is feeling the pain as about 80pc of revenues come from oil and it has spent about $90bn in reserves plugging the gap in its budget. However, it has enough oil in reserve to continue the price war for another five years.
At below $50 a barrel, some $1.5 trillion of planned spending in the North American industry would be loss making, according to Wood MacKenzie.
Bonds in US shale producer Chesapeake have crashed as investors face being wiped out
Fed turns the screw
The second seismic shift in capital markets will come as the US Federal Reserve meets on December 16 to decide whether interest rates could rise for the first time since 2006. The central bankers have little idea what the impact of tightening monetary policy will actually be.
“When I look at bond markets today I feel we still have an immensely distorting effect from unconventional monetary policy, which means you cannot look at bond markets and believe they are pricing in all of the risks that are potentially out there, particularly around the solvency of governments,” said Anne Richards, chief investment officer of Aberdeen Asset Management, at the CFA Institute European Investment conference last week.
Ms Richards said it was “quite conceivable” the distortion in bond markets can continue for quite some time, just as it has done in Japan for the past 20 years, and that a potential December rise had more to do with “putting a little bit in the toolkit” as the US economy is looking late-cycle with flat profit growth and investment.
The cost of borrowing in the US has already soared. The yield on two-year treasury notes reached its highest level in five years last week. The strength of the US dollar and the rising return on treasuries will result in a vast redistribution of capital as the attraction of emerging markets is diminished in favour of the US.
Truth be told, the central bankers have little idea of how world markets will respond during the comingtwo weeks. Money managers have been searching for any hint of how to position investments for the year ahead and could react very quickly once the ECB, Opec and US Federal Reserve decisions are known.
The impact on British investors will be painful. Around a quarter of the FTSE 100 is weighted towards commodities either directly, or through support services and engineering. The UK blue-chip index has fallen 2.9pc so far this year, and further pressure on commodity prices will see painful cuts to dividend income as cash flow is placed under serious strain.
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