Monthly Market Report - September 2015

26th August 2015

With commentary from David Stevenson

Events in China may be drawing a huge amount of attention amongst investors but back in the developed world a rather old debate has recently started again - the battle between inflationists and deflationists. This argument hinges on a close reading of measures such as the CPI and RPI but it also has a huge impact on the pricing of varying assets. If the inflationists are right and we're about to see sharply rising prices, all bets are off bonds, while gold suddenly looks much shinier. By contrast if the deflationists are right - and they have been for the last few years - the global economy is still struggling with anaemic global demand, and declining prices powered in part by falling commodity prices.

We'll examine this debate a little later but for now most attention is focused on the energy markets - and the price of oil. After a buoyant few months of rising prices, oil prices have started falling again with the $45 and $50 a barrel barriers breached for West Texas and Brent respectively. Are we about to see any lunge downwards, helped along by that recent Chinese devaluation of the remnimbi? One key dynamic could be that seminal deal with Iran. The oil bears reckon we'll see a huge wave of oil output unleashed following the deal while oil bulls caution that the devil is very much in the detail. Analysts at Goldman Sachs for instance suspect that the Iran deal is indeed important but that any surge in supplies is likely to be delayed. According to a note to their investors on July 14thGoldmanís analysts observed that "Once inspectors verify compliance, the sanctions relief would be wide ranging: the EU oil embargo and other nuclear-related EU economic and financial sanctions would be lifted and Iran would also be allowed to use SWIFT for international banking. The nuclear-related secondary sanctions imposed by the US, which are generally aimed at trade between non-US companies and Iran, would also be lifted once the IAEA verifies compliance.....the above timeline suggests that the sanctions relief under the agreement would take effect most likely in early 2016 assuming no additional delays."

Unfortunately that's where the good news ends reckons Goldmanís. The bank's analysts reckon that eventually Iranian energy supplies will find their way on to the global markets over the next few months, depressing prices in the short term pushing oil prices sharply lower. Goldman's, once notorious for its bullish projections for oil, has now turned decisively bearish - and itís not alone. Another recent note from an investment bank, this time Societe Generale, observes that "$59 Brent is $5 lower than its range bound June average of $64, and $53 WTI is $7 lower than its June average of $60. China, Greece, and Iran have clearly caused an upswing in risk aversion, which has been bearish for crude.Ē But the SG analysts aren't completely bearish. They reckon that measures focused on refinery output offers some hope. As the SG analysts note "Strong product demand, refining margins, and crude demand should drive a recovery. Itís still summer, and gasoline is key. The most likely catalyst, in our opinion, will be gasoline.Ē

Yet despite this slightly more optimistic tone, most energy analysts have turned bearish again, with many now predicting a big test at $40 a barrel for West Texas crude. If that happens, expect even more carnage in the commodity markets with industrial metals first in line for a sharp fall in prices.

Plunging commodity prices will of course be grist to the mill for the deflationist side of the debate - although itís also fair to say that plunging oil prices must be great news for consumers in the West. And surely as their demand for shiny new goods and services begins to pick up again, we'll see inflation start to rise again?

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