One Load Gone

One heavy load the market faces is the price of oil which, to my surprise, no longer helps people when it falls, perhaps because the US is now a swing producer. Back when I worked for the Senate Foreign Relations Committee, my boss, Sen. Clifford Case (R-NJ) said the only way we could get out of the clutches of OPEC is if we stopped importing oil. Now we really have cut back thanks to shale, alternative fuel, and cars consuming less gasoline.

OPEC is reportedly working on a deal to cut oil output between some of its members and non-members like Russia. The mere hint of this, reported by CNBC boosted the price of oil to over $32 per barrel. The Iraqis appear to be the intermediary between fellow-Shiites of Iran and fellow-Arabs of the Gulf and Saudi Arabia.

Crude oil rose 6.1% in Europe and, 5.8% here. That’s one overhang on the markets gone, if this pans out.

The other one is China, more difficult. China is unlikely to listen to the message from the governor of the Japanese central bank. But with Shanghai stocks falling 6.4% and Shenzhen ones falling 7.1%, Haruhiko Kuroda has a point. He advised China that it might do better by re-imposing exchange controls.

The Beijing regime is in a quandary. China wants to become an international currency player, and got the renminbi recognized as a global currency by the International Monetary Fund. Yet its dire economic situation requires that the government keep interest rates low and exchange rates high without capital controls. This amounts to what economists call “an impossible trinity”. Monetary policy can only achieve two of the three goals at any time.

The main reason for the drop in China stocks was news from Bloomberg that the mainland recorded $1.94 bn of December exports to Hong Kong for every dollar of imports HK registered. Some $22.3 bn went missing out of $46 bn of shipments supposedly made to Hong Kong. This bleeding of Chinese reserves backed the opinion of George Soros that Chinese banks will fail and led to the market falls.