Horrifically low oil prices and interest rates are a deadly combination when it comes to the markets.
In fact, Francisco Blanch and his commodities research team at Bank of America Merrill Lynch pointed out in a note this morning that “joint meltdown” in both these areas has wiped out $3 trillion (£2.1 trillion) in energy and financials’ equity market value.
Putting a number on it shows just how bad these types of companies have got it at the moment.
Oil prices are hovering around the $30 per barrel mark at the moment — a far cry from triple digit highs from July 2014.
Blanch and his team say that because of the sharp drop in oil prices, central banks have been prevented from raising rates because the low prices push down inflation expectations.
For example, in Britain rates have stayed at a record low of 0.5% since 2009 and it looks high unlikely that the Bank of England will hike rates soon. In the US, the world’s most powerful and closely watched central bank the Federal Reserve only hiked rates in December last year but some economists have called the move “stupid.”
Effectively, Blanch and his team at BAML say that these points combined have massively wrecked the markets. Here’s a more detailed explanation for where the team got its numbers from:
On the one hand, the energy sector represented 9.5% of the MSCI global equity market index back in the summer of 2014 when Brent stood at $110/bbl and it is now down to just 5.9% (Chart 6), compounding a market capitalisation loss of about $1.8tn. On the other hand, the financial sector equity market cap loss since mid-2014 now amounts to $1.1tn, suggesting that the joint meltdown in oil and rates can explain about 62% of the $4.9tn drop in global equity market valuations since the summer of 2014.
And here’s the killer chart:
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