Fly, Fly, Fly
“The euro fell to its lowest level against the dollar in nine years Monday, driven by fears of political turmoil in Greece and hopes for more monetary stimulus from the European Central Bank. By lunchtime in Europe, the single currency had fallen to $1.1914 and has now fallen over 2c against the dollar since the start of the year.” Meanwhile, “oil slid further in Asian trade Monday on concerns that the glut in global oil supply will extend well into this year (alt), and after major brokerages including Citigroup slashed their oil price forecasts for 2015 and 2016…’Three massive factors have come to a head as 2015 opens: the U.S. shale revolution, the Saudi refusal to cede market share to other producers and a weak world economy.” Speaking of which, the United States is seen as being fairly insulated from the weak world economy. “In the US, it is a happy new year already…Payroll employment rose 2.73 million over the 12 months through November, the best such gain since March 2006. The average hourly wage rate rose 2.1% y/y that month, while PCED prices rose 1.2%. The recent plunge in gasoline prices is providing consumers with an annualized windfall of about $200 billion. This happy news is boosting various measures of consumer confidence (e.g. Consumer Comfort Index and Consumer Confidence Index)…Consumers are in the mood to spend some more. Revised data showed that they did so during Q3, contributing 2.2 percentage points to the quarter’s 5.0% increase in real GDP.” Meanwhile, US automakers are reporting their best year for sales since 2006 “thanks to cheap fuel and low interest rates.” All of that, combined with a “THIS is the YEAR!” mentality about interest rates, basically sums up the reasons for why the United States is the herd’s favorite investment going into 2015. It could also explain why the $US has been so strong lately. Which is really great news, unless you have a lot of $US denominated debt and don’t make much income in $US. For example: “Companies in China and Brazil account for a hefty portion of the $1.3 trillion in dollar-debt issuance since 2008, according to data-provider Dealogic. Energy companies are some of the biggest borrowers (e.g. Petroleo Brasileiro, China National Offshore)…Although oil-firms’ income is largely denominated in dollars, plummeting crude prices are pushing up default risks. Companies with local currency income where the exchange rate could continue to turn against them are particularly exposed to the dollar’s rise.” Meanwhile, VoxEU researchers say that when the VIX is high, beware the capital flows out of emerging markets. Also, the only thing emerging markets can do to prevent this outflow is to raise rates, which (obviously) raises borrowing costs for companies like Petroleo Brasileiro and the like.