The Global Economy: From Capital Markets to the Price of Oil
Michel Morkos Al-Hayat - 03/09/07//
Capital markets worldwide are recuperating from the after-effects of the high-risk, US real estate mortgage crisis. Many funds went bankrupt as a result of this mortgage crisis, particularly in the US, while thousands of jobs were lost. Lots of big institutions had a difficult time implementing their future plans for expansion- they put a stop to them and cancelled deals. A large number of commercial banks were harmed, be it in the US, Europe, Asia or Australia. Investors did not believe the crisis was irreversibly over; instead, they were left unsure of the stability of market gains in the wake of the US Federal Reserve's decision to lower interest rates by half a percentage point on the money it lends out to the commercial banks yearning for liquidity.
It seems the mortgage crisis did not result from real estate sales in the US market, but rather due to the failure of civilians- in this market- to make good on their financial commitments as a result of the rise of interest rates on mortgage credit risk. In July 2007, the sale of houses rose by 2.8% over June and 5.4% more housing units were sold than the experts expected. The number of housing units sold was corrected in June with an increase of 1.4%. Only the sale of new condominium units was put back by 10.2% than what it was in June 2006. Contrary to what was expected, the US mortgage crisis was absorbed while its impact on world capital markets- particularly in Asia and the Middle East- meant big losses and the flight of foreign investors.
The winner in this crisis were US treasury bonds, a financial instrument with guaranteed returns, even when they are at a lower rate than the returns of private stocks and bonds debts. Creditors flocked to these bonds at a rate lower than their official levels. The reserve needed subscriptions like these in order to float the deficit and vary the investment sources far away from the grasp of China or Japan- the two countries most subscribed to them. China alone has a subscription of $200 billion in US treasury bonds.
The mortgage crisis was preceded by world panic that there might be a record hike in the price of oil. Although the level did not overshoot previously recorded numbers, the world economies worried they might not be able to shoulder the burden of such an increase. The Americans partly blamed OPEC for this negative impact because it refused to raise its oil production levels.
The price of oil, as supported by the facts, is not a result of the lack of supply or increase of demand. On the contrary, it results from the mechanism of achieving profits and losses that is regularly followed by oil companies and merchants, so that they control the market. This mechanism often comes to light when there is a drop in the level of trade reserves or strategic reserves of oil and its derivatives. It also happens when the refineries fall short of refining the derivatives needed to answer all the world's needs, particularly in the US, the biggest oil consumer. It is worth noting that low reserve levels in Japan and China, the second and third biggest consumers, do not have the same effect on the market as low US reserves do.
The facts show that demand outstripped supply in the first five years of this millennium, except for 2002. Other than that, supply has always outstripped demand. Average daily supply reached 80.14 million barrels and demand was 79.88 million barrels. Between 2001 and 2005, supply grew by 2.2% and demand by 1.95% annually. These figures shed suspicion over the reasons why oil prices have risen world-wide and their real state was concealed, with the goal of siphoning off oil reserves in order to float the "greed" of the US market with a weak dollar in the face of major currencies - thus affecting those regions using the Euro, the UK, developing countries (foremost among them China and India), as well as Japan. This hiked up the price of production.
So we can pinpoint the mortgage crisis and the oil price increase crisis via reasons that may be deliberate. The US is enjoying sound economic growth. The consecutive crises did not succeed in arresting its growth rate, except to a slight degree. It did not unbalance the economy, and was limited to specific economic sectors and subsidiary activities.
Ripples from the crisis reached the International Monetary Fund, which reassessed its calculations for the world's GDP. The IMF said it will be affected slightly and brought down expectations from 5.2% for 2007-2008, to about 5% or a little less. Undoubtedly, the US mortgage crisis and the hike in oil prices left harmful fingerprints. Bretton Woods will harness its optimistic outlook and reassess its forecast before publishing it in mid-October. Major economic institutions, such as the UBS bank (the biggest banking institution in Europe in terms of income) expect the world economy to shrink within a narrow margin of no more than 20%, but "the worst is not always assured, and an expanded slowing down of economic growth is linked to how much longer the crisis will last in the markets."
The aftershock hit the stock market in a way that losses could not be recouped in the short-term. The gains made after banks were floated with the needed cash and the decreased interest rate in the US on intra-bank loans invigorated stocks in some sectors at the expense of other losing, deteriorating sectors. Investors turned to stocks that were more guaranteed, less risky, and less vulnerable to any shakedowns.
Investor confidence will remain edgy and unstable vis-à-vis risk after the foundations of capital market operations were shaken and there was a lack of confidence in the transparency needed for censorship. The link between capital markets and major banks brings to the forefront the possibility of a meltdown in client deposits and savings. This is harmful to the movement of capital in investment and expenditure markets.
The effects of market volatility will show up in the third quarter of the year, and likewise reflect on the price of oil for almost a year from now, with the advent of autumn and beginning of winter.
*Michel Morkos is director of Al-Hayat business desk.
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