Oil’s price drop currently dominates market coverage. While some analysts argue the net effect is positive, the majority of economists now believe the overall impact is bearish. Economist James Hamilton recently provided an explanation: the combination of job loss and declining capital purchases outweighed the benefits of potential increased consumption.While his article focused on North Dakota and Texas, its reasoning can be applied to entire countries such as Saudi Arabia and Venezuela.
However, it’s possible the market could be bottoming:
Overall volume was higher in January, possibly indicating a selling climax. And prices are right below key resistance. A move above the downward sloping trend line would indicate a reversal of the downward trend. Recent stories of potential production cuts provide bullish support:
Talk of co-ordinated production cuts has gathered pace this week, with the head of OPEC calling on the world’s largest producers to help stem the worst price collapse in decades. Russia’s state oil pipeline monopoly, Transneft, said on Wednesday it would discuss possible output cuts with the cartel.
By Friday, Russia walked back talk of a production cut. But with the potential fiscal problems faced by countries like Saudi Arabia and Venezuela, it’s increasingly likely we’ll start to see further talk along these lines.
The BOJ’s announcement that they would take rates negative proved to be the most important news item this week.
The Introduction of “Quantitative and Qualitative Monetary Easing (QQE) with a Negative Interest Rate” ²
The Bank will apply a negative interest rate of minus 0.1 percent to current accounts that financial institutions hold at the Bank. It will cut the interest rate further into negative territory if judged as necessary. ²
The Bank will introduce a multiple-tier system which some central banks in Europe (e.g. the Swiss National Bank) have put in place. Specifically, it will adopt a three-tier system in which the outstanding balance of each financial institution’s current account at the Bank will be divided into three tiers, to each of which a positive interest rate, a zero interest rate, or a negative interest rate will be applied, respectively.
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