Download CHIEF ECONOMIST`S COMMENT Oil price decline has

Helaba Research
CHIEF ECONOMIST’S COMMENT
12 January 2015
Oil price decline has downsides, too
AUTHOR
Dr. Gertrud R. Traud
Chief Economist/
Head of Research
phone: +49 69 91 32-20 24
[email protected]
EDITOR
Markus Reinwand, CFA
PUBLISHER
Helaba
Landesbank
Hessen-Thüringen
MAIN TOWER
Neue Mainzer Str. 52-58
60311 Frankfurt am Main
phone: +49 69 91 32-20 24
fax: +49 69 91 32-22 44
2014 was not really a good year for equities. Despite the DAX reaching historic all time highs and
surpassing the 10,000 mark, albeit temporarily, it saw a correction down to around 8,350 points
and thus, by and large, settled in the range we had forecast of 8,300 to 10,000 points. We were
somewhat surprised, however, by the end-of-year rally. Within a space of only two weeks the DAX
had jumped by nearly 7 per cent and, with that, was just about able to see out 2014 in positive
territory.
The New Year has started in rocky fashion. While the strong fall in the oil price was still deemed
positive towards the end of last year, the beginning of this year has seen the associated risks come
to the fore. Among other things, the question has arisen as to whether the huge expansion in fracking in the USA has been built on the back of a credit bubble. With the price of oil declining steeply,
this could not only put pressure on these energy companies but also on the banking sector and the
financial system as a whole.
After the failed presidential election in Greece, the discussion about a possible exit of the country
from the eurozone (aka "Grexit") spooked the markets for a short time. Investors were back in
buying mood relatively quickly, though, when negative inflation rates were reported in the eurozone. This news boosted the expectation that the European Central Bank would soon start purchasing government bonds.
The strong fluctuation on the German stock market last year thus seems to be continuing into 2015
as well. The prospect of European monetary policy becoming increasingly expansionary is currently helping to prop up equity markets. However, with price levels already high, it is not possible to
infer any long-term upward potential from this.
In the medium term, the falling oil price will certainly have a positive effect on the local economy.
Consumer spending, in particular, should benefit from it. On the other hand, the dramatic plunge in
the price of oil also has its downsides. For businesses, it is unclear as to whether the net effect of
the drop in oil prices is positive, at least in the short term, since the fall in prices is obviously not
just a result of a glut in supply but also of weak global demand. The pressure on oil exporting countries is already clearly visible in Russia, for example, which will slip into recession this year. Accordingly, demand from oil exporting nations will weaken considerably – this applies both to goods
as well as investments, especially European equities.
This publication was very
carefully
researched
and
prepared. However, it contains
analyses
and
forecasts
regarding current and future
market conditions that are for
informational purposes only.
The data is based on sources
that we consider reliable,
though we cannot assume any
responsibility for the sources
being accurate, complete, and
up-to-date. All statements in
this publication are for informational purposes. They must not
be taken as an offer or recommendation
for
investment
decisions.
In contrast to this, exports to the USA are showing very welcome growth. The decline in the euro's
value is particularly favourable in this respect. With a share of 8.4 per cent of total German exports,
this is an especially important sales channel for German products. Strong demand for German
goods in the USA is not only a result of the exchange rate situation. In fact, responsibility lies far
more with strong growth in the US economy, on which this demand is based. The US unemployment rate has been below the 6 per cent mark for some time now. The fall in crude oil prices has a
far greater effect on US consumers than on us because tax rates on energy products are much
lower. As such, we anticipate that the United States economy will grow by 3.3 per cent this year.
HEL ABA RESEARCH · 12 JANUARY 2015 · © HELABA
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C H I EF ECO NO MI ST ’S CO MM ENT
As a consequence of this strong economic growth and impending shortages on the labour market,
the Federal Reserve does not really have any reason to maintain interest rates at nearly zero any
longer. In light of Fed Chair Janet Yellen's most recent comments, though, no immediate rate rise
can be expected. However, we assume that it will happen in June and that the target corridor at the
end of 2015 will be between 1 and 1.25 per cent, in other words 100 basis points higher than now.
This sword of Damocles will be looming over the German equities market in 2015, too. The DAX is
likely to surpass the 10,000 point mark this year as well; however, due to numerous downside
factors, it will presumably test the region around the 8,300 mark once again, too.
Commentary published in “Die Welt“, 10 January 2015 
HELABA RESEARCH · 12 JANUARY 2015 · © HELABA
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