The Week in Review: Equity Volatility, Falling Oil, GDP Revisions


Globally, stocks slid while American stocks oscillated between gains and losses as investors assessed the impact that cheap oil will have on global markets.

While the Greek stock market saw its worst day since the 1980s, stocks in Russia, China, and Japan fell as Japan announced that its recession is worse than previously estimated and China began tightening credit for domestic corporate and municipal borrowers. China’s move to improve credit quality, combined with a slowdown in Japan and cheap oil, created havoc in the international markets.  In the United States, improving demand for services and higher retail sales helped stocks to recover later in the week, although volatility remains high.

China Credit, Japan Contraction

The China Securities Depository and Clearing Corporation tightened collateral requirements for municipal and corporate borrowers, who can no longer use debt rated below AAA or AA as collateral for short-term loans. This affected 470 billion yuan, or $75.8 billion, of outstanding debt.  Chinese stocks fell more than 2.5% on the news.

In Japan, the Bank of Japan announced that the GDP shrunk more than previously estimated, while exports to emerging markets continued to fall. As a result, Japan’s GDP fell 1.9% in the third quarter of 2014, causing a new test to Prime Minister Shinzo Abe, who called for a referendum that will take place in December. PM Abe’s party still maintains a majority in polls.

U.S. GDP Expectations Upgraded

Economists are expecting a strong U.S. GDP figure to come for the fourth quarter after services saw a 5% year-over-year revenue growth, causing many investment banks to upgrade GDP expectations.

In the U.S., retail sales increased 0.7%, with many analysts attributing the growth to falling oil prices and greater consumer purchasing power in America.  Eleven of 13 retail categories saw spending growth, while aggregate sales rose at the highest rate in eight months. The gain was far above most analyst expectations.

Meanwhile, unemployment claims fell to 294,000, or a four-week moving average of 299,250, roughly flat with the previous week’s average. This is the lowest rate of unemployment claims since January 2000. The weak rate of jobless claims indicates less layoffs, again indicating strengthening U.S. GDP.

Oil Fails to Find Bottom

On Thursday, WTI oil futures fell below $60 as traders saw weak demand and a supply glut, after OPEC downgraded future demand expectations and maintained supply. Falling oil created volatility in equity markets, which fell on Wednesday but recovered on Thursday as investors weighed the impact of cheap oil on U.S. consumer spending and corporate debt.

Fears about energy-related bankruptcies roiled corporate debt markets, causing high yield bonds to fall over 2.2% in the week’s trading, even as long-term U.S. Treasuries gained. Fears about unprofitable energy production also hurt several oil producer stocks.

Many analysts have downgraded oil and cut price targets over the past few weeks, while some analysts suggest that oil will fall to $40 per barrel or lower.