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In Financial Markets, The Butterfly Effect

In Financial Markets, The Butterfly Effect

by Giovanni Verra de Fonseca

Simon Derrick has a window on the real world. The British ‘’Bon vivant’’, one of the last lovers of long lunches of The City, is working for the US bank BNY Mellon.

This huge American institution is the first custodian bank in the world, tied with State Street: it holds on behalf of its clients, $27,000 billions. This is more than the GDP of the United States and the China’s cumulative, the first two economic powers world. It comes to cash deposits but also in bonds, shares, gold or in all imaginable asset classes….

The amount of money that passes through this mammoth institution gives insight into the reality of financial markets. Simon Derrick knows if customers bought Greek bonds or sold of Chinese equities. He has an overview of global financial flows, and can say with confidence if they are moving massively to the dollar or the euro-zone area or if investors flee emerging or are flocking to. After three decades working in the City, he therefore, has a very particular vision of the financial markets.

OPEC decides to strike back against

For him, the underlying fundamentals of a Market have hardly importance. What really counts is the the World Monetary Policy. What the major central banks do such as US Fed,European Central Bank, Bank of Japan, has decisively influenceson the large financial flows.

If we take Oil for example, The experts explain in their analysis papers that the oil prices fall comes first from Shale oil production in the United States. Suddenly the world was faced with overly of crude. The OPEC, worried by that new competition, has decided to counterattack: by refusing to intervene to stop the fall of the prices, the cartel wants to financially asphyxiate American producers, whose production costs are high. That’s for the official explanation.

But Simon Derrick has no time to waste on that kind of phenomenon. “Of course, the fundamentals play a role. Butlook at the date: the barrel peaked in mid-June and turns. Why that date? “. The answer isthe Central BankEuropean side. On June 12, it had introduced a negative refinancing rate at – 0.1%. The objective is to fight against deflation and support the growth.

At the same time, the Fed was just about to start tighten its monetary policy. Immediately, the BNY Mellon customers began to withdraw their deposits in euros in order to transfer them to dollar assets. The euro fell and the dollar increased. “And it is precisely at this time that oil begins to fall, “says Simon Derrick.

What’s the link? The barrel is traded in dollars worldwide. when the greenback rises, it increases the oil in all countries that do not use this currency. Therefore, non-US investors started to turn away. The trigger of the movement was MarioDraghi, the ECB president.

This domino effect is well known from the financial markets: a kind of butterfly effect, where a decision in Frankfurt may have consequencesunexpected at the other end of the planet. If it is not new, it’s amplified in recent years because the managers who control the largest portfolios in the world no longer know where to turn. Theyare at the head of hundreds of billions of dollars on behalf ofUS pension funds, British or Japanese, and they must grow that money.

Investors looking for yield

But with the financial crisis, central banks have reduced their rates directors to zero or even negative levels. Government bonds become very unattractive. Investors (or speculators, as point of view) are in desperate search of yield. They have rushed by turns into commodities, equities markets, emerging countries … At the risk of burning the wings, since it is highly volatile markets. Also at the risk to strengthen the fashion effects, removing all at the same time their investments when they decide that oil henceforth will go downn for example …

That’s why Simon Derrick embarks on predictions that sound heretical today. According to him, it is quite possible that the Russian ruble recovers in the next coming months.The reason? The European Central Bank is launching into the quantitative easing, while the Federal Reserve should increase soon its rates. The euro will therefore continue to fall and the dollar will go up.

The effect on oil will be reversed (barrel has also increased almost 20% in two weeks).

For the Russian economy, which depends so much on the black gold, that changes everything and it could rise the ruble. Mario Draghi savior of Vladimir Putin, who would have thought it? The butterfly effect, always …

Source : http://www.lemonde.fr/journaliste/eric-albert/