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The low oil price creates new deflationary fears

9 August 2016
Consumers
energynomics

The low oil price, of just USD 40 per barrel, after barely returned to 50 dollars, creates new deflationary fears, says Simon Fasdal, head of Fixed Income Trading, Saxo Bank.

“At this level, oil and goods will start dragging again down headline inflation, which is an important concern for central banks, who will try to avoid this,” he says.

Another concern is the possibility that oil prices fall further – they could bring a storm in the energy sector for large corporations.

“It was a disturbing factor in equity markets in January and February; if oil is not ‘normalizing’ over USD 60 / barrel, large states dependent on oil will have to restructure their economies if they are to cope with the new realities.”

In this case, the securities of the emerging markets should be regarded with caution. These states will benefit from lower oil prices – particularly China and India, the most telling examples.

Moreover, the low oil price reduces the pressure on profits earned on classical instruments and brings up to “light” titles with higher degree of risk, corporate bonds and emerging markets bonds. And value added per unit of risk becomes more attractive.

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