E Markets: Bad News Bears

The oil to USD correlation matters for capital flows and investments as well. The breakdown of the US petro-dollar connection and funding mechanisms from OPEC has been ongoing but its effect now is exaggerated by the US rate and deficit divergence. Here is the key part of the NY Fed piece on explaining the correlation - The fact that oil-exporters were not major cross-border investors until the 2000s fits the timeline of when the dollar-oil price correlation appeared. IMF data show the North Africa/Middle East region running current account deficits in the 1980s and 1990s, indicating that this region was borrowing rather than investing in the rest of the world. The balance turned into a $77 billion surplus in 2000 in response to a 50 percent increase in oil prices over the previous two years. The upward trend in oil prices eventually pushed the balance to $340 billion in 2008. The rate of foreign investment by oil exporters has since then moved in step with oil prices, falling to $44 billion in 2009, jumping to $414 billion in 2012, and collapsing into net selling territory in 2015. This narrative may also clarify why the correlation is most noticeable during the large oil price swings, since these were also periods when the volume of cross-border purchases of financial assets changed most.

What Happened?

  • China December Trade surplus rises to $57.06bn after $41.86bn – more than $51.5bn expected with exports at 2-year lows. Exports fell 4.4% y/y after a 5.4% y/y – weaker than the 3% gain expected. Imports fell 7.6% y/y, biggest decline since July 2016, after a 3% y/y gain in November – and weaker than the 5% y/y gain expected. For all of 2018, China exports were up 9.9% y/y – best in 7-years – while imports rose 15.8% y/y. China’s surplus with the US rose 17.2% to $323.32 in 2018 – most on record and up 17.2% y/y but December exports -3.5% m/m and imports from the US fell 35.8 m/m. 
  • India December WPI 3.8% y/y after 4.64% y/y - less than the 4.42% y/y expected. Manufacturing WPI fell to 3.59% from 4.21% y/y, Food rose to -0.07% after -3.31% y/y, Fuel fell to +8.38% after 16.28% y/y. 
  • Germany December WPI -1.2% m/m, +2.5% y/y after 3.5% y/y – less than the 3.4% expected. For all of 2018, WPI rose 2.7% y/y. 
  • Sweden December CPIF up 0.4% m/m, 2.2% y/y after 2.1% - more than 2.1% expected. The overall CPI rose 0.4% m/m after -0.1% m/m – holding 2% y/y gains – as expected. 
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