Although Americans might have been sufficiently distracted this week not to have noticed, it seems a perfect storm of bad news is making its way around the world, almost like a giant whirlpool circling around a drain.
With American attention divided between the Super Bowl distraction and the New Hampshire distraction and the Zika “pandemic” distraction, the rest of the world is sliding into financial meltdown.
In Japan the entire “Abenomics” pipe dream blew up in convincing fashion this week, with the yen surging, the Nikkei plunging into the red and Japanese 10-year bonds dropping into negative territory for the first time ever. With the benchmark rate now negative, investors are essentially paying the government to buy its debt from them, knowing that they will lose on the deal if they hold it to maturity. All of this follows last month's surprise move into negative interest rates by the Bank of Japan, meaning the central bank is now charging the nation's banks for parking money in reserve.
Banking woes are likewise causing headaches in Europe where as of press time the STOXX Europe 600 bank sub-index was down 9% on the week (with a number of Italian banks being suspended from trading), the .SX7E bank index was down for its seventh straight week (on par with its 1998 losing streak record), and the FTSEurofirst 300 was down for a seventh straight day. Market jitters are spurred on by lingering concerns over Deutsche Bank, which last week had to assure markets that it actually has enough reserves to make its AT1 bond payments. The bank's stock is continuing its downward slide.
And as bad as things are in Europe and Japan, they may be even gloomier in South America. Brazil is still ravaged by political and economic turmoil, with the real plunging and GDP plummeting along with it; after a 3.7% contraction last year, the economy shows no signs of pulling out of a nosedive. In Argentina, newly-minted President Mauricio Macri is giving hopes to vulture creditors around the world by promising to make good on their defaulted bonds, which were bought up for pennies on the dollar by hedge funds and international investors during the depths of the crisis. And Venezuela is officially a basket case, with the economy contracting 7.1% in fiscal 2015 with inflation up 141.5% and counting.
Meanwhile oil markets are showing no signs of recovery as the International Energy Agency releases its Oil Market Report for February. The report predicts a surplus of 2 million barrels per day on global oil markets in the first quarter of this year and 1.5 million barrels per day in Q2. Adding to the downward pressure is the global economic slowdown, which is predicted to decrease oil demand to 1.2 million barrels per day. Analysts are now predicting oil to drop by as much as 20% more this year, creating more defaults in the energy sector, which would in turn feed into the stress on the banking sector.
Although Americans might have been sufficiently distracted this week not to have noticed, it seems a perfect storm of bad news is making its way around the world, almost like a giant whirlpool circling around a drain. Of course, if that analogy were extended to its logical conclusion it would be none other than Janet Yellen holding the drain plug in her hand, watching the handiwork of last December's rate hike working its magic and dragging down the world economy around her. If anyone still thinks the Fed is going to continue raising rates this year they need their head checked. There's only one way rates are going from here: down, along with the rest of the global economy.