Oil Falls
A few months ago, we wrote how oil had skyrocketed recently for various reasons, primarily the war in Ukraine and the resulting international sanctions on Russia. In that article, we noted how notoriously boom and bust the oil and gas industry is, which is why it is not too much of a surprise that oil posted its worst trading day in months, with West Texas Intermediate futures slipping below 100 USD. The 8% fall represents the largest decrease since the 9th of March. Although lower oil prices may seem like a good thing, the cause for the fall is not so uplifting. The belief among traders is that recessions on a global level in the coming months and years will drastically reduce demand for oil. That reduction, when coupled with an increasingly strong USD, means that there is not much faith in the world’s ability to pay increased prices, even if they have been cut off from a main supplier (Russia). Citigroup even estimates that WTI could fall to 65 USD by the end of the year.
China’s Zero
One reason that markets have been spooked recently is that China continues to press its zero-COVID policy, despite the fact that new mutations of Omicron are increasingly transmissible. The country seems hellbent on fighting an unwinnable battle, and they are sacrificing their economic prosperity in the process. With cases doubling in Shanghai recently, they launched mass testing in nine different districts, stoking fears of mass lockdowns in the critical business centre.
Such lockdowns are already taking place in Xian, a major tourist city known for the Terracotta Army. Tens of millions of people cannot leave their homes, and businesses were forced to close. Such lockdowns not only paralyse Chinese business, but the world economy. Because of China’s massive influence as a trading partner to just about every other nation, as China goes, so goes the world. The Japanese bank Nomura estimated that some 114 million people were under full or partial lockdowns in China as of last week, a jump of almost 50 million from the week before. Beijing, which has only had a few infections as of late, requires its 21 million residents to line up for PCR tests every three days to access public buildings and even basic stores. Everyone in China is living in purgatory. No one can make plans, and political leaders appear that this tactic make foment mass unrest if they do not change course soon.
A Strong Dollar
With the USD strengthening against most other major currencies (as of the time of writing, the EUR and the USD are practically equal), people are wondering about the implications of a strong dollar for American business. While a strong dollar means that Americans can enjoy international holidays more readily, there will also be more serious impacts. For Americans, imports will be cheaper. But exports will suffer. Companies will experience lower export volume, which entails reduced profits. The more international markets a company sells to, the more they will face the brunt of the strong dollar.