THE BLOG

Markets Collide: Irresistible Oil Meets Immovable QE

23/01/2015 10:39 GMT | Updated 24/03/2015 09:59 GMT

The price of Brent Crude has been languishing around and under $49 per barrel form over a week at the time of writing - its lowest level since April 2009. This continued weakness has resulted in a continued fall in inflation across the globe and the Eurozone actually recorded a fall in prices of 0.2 per cent for November. It is estimated that weaker oil prices contributed 0.4 per cent to this figure. The question that many economists are asking is if operators in other sectors will pass on savings that they are receiving as a result of the oil price fall to consumers. The fear is that deflation may become a real threat.

In the Eurozone, the European Central Bank (ECB) has succumbed to pressure to embrace quantitative easing (QE). The purchase of 60 billion euros of bonds per month, with some 1.1 trillion to be injected in total, according to ECB president, Mario Draghi, is far more than originally anticipated (there was talk of a programme of bond purchases of some 500 billion euros initially).

However, Germany has been reluctant to agree to QE if it includes investment in the debt of the weaker European countries and, in particular, Greece. The current suggestion is that the programme will be restricted to the purchase of investment-grade debt only and may even focus on AAA-rated sovereign debt thus avoiding Greece, Italy, Spain and Portugal.

It is clear that the Germans must be cautious about underwriting any QE programme that engenders real risk of it having to meet losses. Its own economy is slowing further and recent figures showed that exports fell by 2.1 per cent in November after a fall in October and that industrial output fell by 0.1 per cent. Mario Draghi cannot expand the ECB's balance sheet by 1.1 trillion euros during 2015 in order to avoid stagnation and deflation in Europe without the agreement of Germany.

He has that agreement, but I wonder whether the devil might not be in the detail here. The German psyche is obsessed by quelling inflation (a legacy of the trauma of the Weimar Republic's post World War I hyper-inflation). They insist that QE is no long-term solution for structural problems in struggling Eurozone economies. Just how the QE will be managed, and the fine print of the detail will make for interesting reading. Somewhere in the mechanism of Eurozone statecraft, one suspects, may be as yet unknown provisions for individual state-accountability, or individual central bank accountability. We'll see.

If QE is a massive block of money (no-one's quite saying it's immovable) tending to pump up prices and spending, the precipitous fall in the oil price has resulted is a near-irresistible force working against it.

The fall in oil prices has helped engender sharp declines in share prices around the world, but the long-term effect of a lower oil price is to reduce the amount of cash in the pockets of oil producers and increase the amount available to consumers to spend. Overall, this is positive for markets and this will ultimately be reflected in share prices.

I'll reflect in greater detail on the ramifications of all this on stock sectors and economies in my next blog.