While it is unclear whether it is due to the rare event that no central bank stepped in overnight with a massive liquidity injection or because the USDJPY tracking algo hasn’t been activated (moments ago Abe’s deathwish for the Japanese economy made some more progress with the USDJPY hitting new mult-year highs over 113.6, on its way to 120 and a completely devastated Japanese economy), but European equities have traded in the red from the get-go, with investor sentiment cautious as a result of a disappointing the Chinese manufacturing report. More specifically, Chinese Manufacturing PMI printed a 5-month low (50.8 vs. Exp. 51.2 (Prev. 51.1)), with new orders down to 51.6 from 52.2, new export orders at 49.9 from 50.2 in September. Furthermore, this morning’s batch of Eurozone PMIs have failed to impress with both the Eurozone and German readings falling short of expectations (51.4 vs Exp. 51.8, Last 51.8), with France still residing in contractionary territory (48.5, vs Exp and Last 47.3).

Regarding Europe’s final September PMI print, Goldman comments as follows: “The Euro area Final manufacturing PMI printed at 50.6 in September, 0.1pt below the Flash estimate (and the Consensus expectation). This implies that the Euro area manufacturing PMI rose 0.3pt in October, the first increase since April. The German Final manufacturing PMI for October was revised down 0.4pt while the French manufacturing PMI was revised up substantially by 1.2pt. The Spanish manufacturing PMI surprised slightly to the upside by remaining unchanged at 52.6 (Cons: 52.2). The Italian manufacturing PMI fell notably by 1.7pt to 49.0 (Cons: 50.6). This suggests some implicit downward revisions outside Germany/France.”

The breakdown in October was mixed. Both new orders and stocks improved marginally, the former increased by 0.3pt to 49.5, while the latter increased by 0.4pt to 50.0,leaving the forward-looking order-to-stock ratio slightly lower in October; following gradual declines during 2014, this ratio now stands at the lowest level since April 2013. Production and employment improved by 0.5pt and 0.3pt in October, respectively.

With today’s Final print, the Euro area manufacturing PMI is now estimated to have risen slightly in October (0.3pt), the first increase since April. Between April and September, the Euro area manufacturing PMI eased by about 3pt. Prior to that, the Euro area manufacturing PMI rose sharply by around 10pt between July 2012 and early 2014 (and remained broadly unchanged in the spring).

On an index specific basis, the MIB leads the way lower for Europe with Snam (-6.7%) and Terna (-11.5%) sharply lower following Mediobanca cutting rating on both companies in reaction to the Italian energy regulator’s gas storage remuneration decision. Italy’s Monte Paschi continues to be halted first down, then up, after tumbling again earlier today, then surging, but in any event is now 40% lower since the stress test results were announced. Elsewhere, HSBC (-0.3%) reported this morning and trade with modest losses after they fell short of expectations and set aside USD 378mln in provisions for FX investigations. Furthermore, Ryanair (+9.1%) have lifted UK airliners after their pre-market update where they lifted their forecast, with easyJet and IAG leading the FTSE 100. With macro newsflow relatively light over the weekend, fixed income products have seen a flight to quality and have traded in the green throughout the session.

Of course, by now everyone knows that the traditional pattern is weakness at the US open, ramping into Europe close, then ramping some more to preserve faith in central planning. Today should be no different.

Looking at today’s economic calendar, we have U.S. manufacturing PMI, ISM manufacturing, construction spending, vehicle sales due later.

Market Wrap

In short: European shares remain lower with the utilities and health care sectors underperforming and travel & leisure, basic resources outperforming. Euro-area October manufacturing PMI was below estimates, U.K. PMI above. Companies including HSBC, Holcim Ryanair issued results. The Italian and Spanish markets are the worst-performing larger bourses, the Dutch the best. The euro is weaker against the dollar. Spanish 10yr bond yields rise; Greek yields increase. Commodities gain, with soybeans, corn  underperforming and natural gas outperforming.

• S&P 500 futures down 0.1% to 2010.1
• Stoxx 600 down 0.2% to 336
• US 10Yr yield down 1bps to 2.33%
• German 10Yr yield at 0.84%
• MSCI Asia Pacific down 0.8% to 140.8
• Gold spot down 0.1% to $1172.5/oz

Bulletin Headline Summary

• Lacklustre Chinese and Eurozone manufacturing PMIs dictate the price action in Europe with equities trading in a sea of red.
• USD/JPY breaks above overnight highs at 112.99 and trips stops through 113.00 to trade at its highest level in 7 years.
• Looking ahead, attention turns towards US manufacturing PMI, ISM manufacturing and any comments from ECB’s Constancio, Fed’s Evans and Nowotny after the European close.
• Treasuries steady before Markit and ISM manufacturing PMIs as traders await ECB rate decision and Draghi press conference Thursday, October payrolls on Friday.
• U.K. manufacturing growth accelerated to the fastest pace in three months in October as buoyant domestic demand offset weakening sales to the embattled euro region
• European manufacturing barely grew last month as factory output in France and Italy shrank
• Last week’s easing moves by the BOJ and Sweden’s Riksbank leave Draghi under pressure to intensify his own response to weak inflation or surrender in a  renewed global currency war that has policy makers looking to jolt consumer prices by embracing weaker exchange rates
• China’s official services PMI fell to 53.8 in October, a nine month low, from 54 the previous month; China’s manufacturing PMI fell to 50.8 from 51.1 in September
• China is opening its 26.31t yuan ($4.3 trillion) interbank bond market to non-financial firms after tightening trading rules following a crackdown on illegal transactions
• BOJ’s unexpected expansion of stimulus puts the spotlight back on Abe’s economic policies and the decision he faces on raising the sales tax
• While corporate profits are higher, the yen is lower and stocks have surged 57% since Abe came to office 22 months ago, sustained economic expansion remains elusive
• Democrats’ 55-45 control of the Senate is in jeopardy, polls indicate before voting tomorrow, with candidates trailing in Montana, West Virginia and South Dakota and incumbents in varying degrees of trouble in Arkansas, Colorado, Louisiana, North Carolina and New Hampshire
• Business Secretary Vince Cable said European leaders are frustrated by U.K. attempts to pick apart key aspects of the European Union’s founding principles, branding it a “dangerous” course for Britain to take
• Spanish Prime Minister Mariano Rajoy is being challenged on a second front as support for the anti-establishment Podemos party surges before an informal ballot on Catalonian independence
• $103.48b IG priced in October, $26.92b high yield. BofAML Corporate Master Index OAS holds at 127; YTD range 106-132. High Yield Master II OAS narrows 5bps to 430; YTD range 508-335bps. CDX High Yield closed at 107.01 from 106.62; YTD range 104.52-109.15
• Sovereign yields mixed; peripheral EU yields higher. Asian stocks mixed; Tokyo closed for holiday. European stocks, U.S. equity-index futures decline. Brent crude steady, copper and gold lower

FX

FX markets, remain relatively tentative, with price action in EUR/USD muted after tumbling to Aug’12 levels overnight after tripping sell stops at the 1.2500 handle to break below Friday’s lows at 1.2585. However, moving forward, price action for the pair may be largely dictated by a raft of option expiries with 3bln due to roll-off for EUR/USD at 1.2500 tomorrow. GBP/USD has been one of the sessions other notable movers following the better than expected UK manufacturing report (53.2 vs. Exp. 51.4) which came in at its highest level since July and pushed the pair back above the 1.6000 handle. USD/JPY trades at its highest level in 7 years after breaking above the overnight high of 112.99 and tripping stops to the upside at 113.00. The move saw USD/JPY take out an option barrier at 113.00, with the next one said to be placed at 113.50 and stops also said to be placed at 113.20.

COMMODITIES

Heading into the North American open WTI crude futures have moved back into positive territory, shrugging off overnight losses following the weak Chinese data, which has placed weight on the precious metals sector. Overnight, precious metals weakened again as the USD resumed its recent rally following the surprise BoJ announcement, with gold (-0.31%) initially falling to near the four-year low it hit on Friday. Silver prices fell in tandem and declined for a fourth successive session to their lowest since February 2010.

Venezuela and Ecuador are working on a joint proposal to defend oil prices that the two countries will present at the next OPEC meeting, according to the Venezuelan PM. (RTRS) As a guide, the next OPEC meeting is scheduled for Nov. 27th

Pro-Russian rebels have voted to set up a separatist leadership in eastern Ukraine, taking the region closer to Russia and defying Kiev and the West, as shelling continues across the country. (RTRS)

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DB’s Jim Reid concludes the overnight recap

After one of the mildest Octobers on record in the UK it seems a shame to welcome in November and what will most likely soon be a cold spell to shock the system. As part of our seemingly endless house renovations we’ve just had one of those new heating systems installed that are zoned and controlled by an app and hopefully will save us money over the medium term. I’ve been waiting for a cold spell to check on my wife’s heating consumption when I’m not there as I can see it all at the touch of a button on my phone. So far its been too warm to need it but things will change soon no doubt. Its fair to say that I tend to put the heating on as late in the year as I possibly can whereas my wife is not impartial to a little boost in August if the weather is unkind. During this mild autumn there have been no arguments. I fear it won’t be long before tensions start though but I at least now have the technology to override from wherever I am in the world. I suspect it will be a brave move to use this veto though.

As its now November we produce our regular cross asset class performance review at the end with all the usual charts and tables in the pdf. Its clearly been a fascinating month and one where the hint of future central bank action (and then on the last day actual action from the BoJ) was enough to see huge swings from the lows.

Central banks continue to be the main story in financial markets and this week attention will move firmly towards the ECB. A few people asked me on Friday as to whether the BoJ surprise move on Friday took the pressure off the ECB or put it firmly back on them. Overall I would say the latter as although the BoJ’s increase in purchases aren’t huge, it does send a message that they are determined to carry on printing money if needed and are clearly prepared to use the currency to help meet their inflation goal of 2%. They’re now buying JPY80tln of paper per month which is getting to within 15-20% of what the Fed were doing at their peak despite being an economy less than a third of the size. Even with that you still don’t get the impression that the BoJ will stop until they’ve succeeded or the policy spectacularly fails. In the meantime if Europe stands still the risk is a repeat of the domestic inflation dip that originated from the last big Yen devaluation from the middle of 2012 to the start of 2014 when EURJPY moved from around 95 to nearly 145 (around 141 currently). Indeed we think the BoJ’s move and likely ECB future move still makes QE4 in the US a realistic possibility when the next US growth slowdown occurs. If there is a global currency war, a stronger dollar will mean the US is unlikely to be able to get rates high enough in this cycle to be able to avoid unconventional policy again in the future. So we still think central banks are trapped into years of money printing ahead.

As for this week, DB’s Mark Wall thinks that if the ECB simply repeat the line that the Council “remains unanimous in its commitment to other unconventional policies if necessary” then it will disappoint the market. So as a minimum they probably need to hint at more accommodation at their December meeting. Its perhaps pretty unrealistic to expect a BoJ-style surprise initiative this week though. Public QE is likely coming but it feels like more of a 2015 story as consensus will take time to build on the council.

Looking at news over the weekend, the main headline was China’s official manufacturing PMI which printed below expectations at 50.8 (51.2 exp.), down from 51.1 in September and marking a five month low. The new orders index didn’t fare much better, 0.6pts lower at 51.6 whilst the input prices index declined 2.3pts to 45.1. This has been followed up this morning with further data in China including a fairly subdued non-manufacturing PMI (53.8 vs. 54 in September) and an HSBC manufacturing PMI of 50.4, unchanged on the reading earlier in the month. Markets are fairly mixed overnight with bourses in Hong Kong, Korea and Australia -0.3%, -0.8% and -0.4% respectively as we type whilst Chinese equities are firmer (+0.3%) despite the softer prints. Japan is closed for a public holiday.

Just recapping a busy day of price action on Friday, the Nikkei closed just shy of intra-day highs at +4.8% whilst the S&P rallied 1.2% and CDX IG tightened 2bps. Treasuries were unsurprisingly weaker given the risk on sentiment with the 10y 3bps wider. The Dollar index rallied 1% including a 2.3% gain versus the Yen whilst Gold declined 2.1%. With the focus on Japan, the data prints went almost unnoticed on Friday with a solid October University of Michigan consumer sentiment reading (86.9 vs. 86.4 in September) and a 5.7 point rise in Chicago PMI offset by softer September personal spending (-0.2% mom vs.0.1% mom expected). The September personal income print (0.2% mom vs. 0.1% expected) and the PCE deflator (0.1% vs. 0.1% expected) rounded off the readings.

On this side of the Atlantic the Stoxx 600 finished +1.8% on Friday to close out a strong week. The soft European inflation prints helped support calls for future ECB stimulus with the core inflation reading marginally lower at 0.7% yoy (0.8% yoy expected) and unemployment unchanged at 11.5%. There were further disappointing prints in France with consumer spending declining 0.8% mom (-0.3% expected) and German retail sales -3.2% mom (-0.9% mom expected) although the numbers were perhaps impacted by holiday timings.

Closer to home, UK banks rallied following news from the Bank of England on Friday that the rules around leverage would be less stringent than widely expected. The BoE have stated that important lenders will face a basic leverage ratio of 4.05% from 2019 with a further buffer of 0.9% for excessive lending, following expectations that the basic ratio could be set at around 5%. Barclays shares surged over 8% on Friday following the news after previous worries that the bank was most at risk whilst RBS, HSBC and Lloyds all rallied on the day. UK Bank credit, especially AT1s, also benefited.

Away from the core markets, Brazil was back in the headlines as it reported its largest monthly deficit on record. The overall public sector deficit of R$69.4bn was the worst since records began in 2001 and comes following a heightened election process and surprising rate hike last week. The BRL depreciated 2.5% versus the Dollar on the back of the print whilst our Emerging Markets colleagues noted the considerable uncertainties around government fiscal plans for next year.

Before we run through the main highlights this week, one thing to note on the agenda are the midterm elections in the US with the result due on Wednesday. The view is largely that Republicans will take control of the Senate, however a result whereby the Senate becomes divided could add some volatility to markets.

As for the rest of the week ahead before we get to ECB Thursday we have a pretty full calendar and then payrolls finishing off the week the day after. Today we kick off with the ISM reading in the US as well as construction spending and motor vehicle sales whilst across the pond we’ll first see PMI prints for the Eurozone as well as regionally in France, Germany and Spain. Tuesday will see Eurozone PPI and we will keep an eye for any interesting comments to come out of ECB’s Costa speaking on the Portuguese economy the same day. We’ll also see the mid-term elections in the US which will be interesting. There will be a lot to digest on Wednesday as we await ADP, the non-manufacturing ISM print in the US along with services PMI in China and retail sales readings in Europe and various composite and services PMI prints across the continent. This all comes at the same time as various members of the Fed are speaking, in particular we’ve got Kocherlakota commenting on monetary policy and Lacker speaking on financial stability. At the back end of the week it’s time for claims data in the US on Thursday along with the remaining PMI prints in Europe. We round out the week with industrial production in Germany and the ever important payrolls data on Friday in the US. Our US colleagues expect a print of 225k. In case that wasn’t enough to digest, we’ve got earnings reports from 84 S&P500 companies and 101 Stoxx 600 companies for us analyze. The standout names include Walt-Disney and Time Warner in the US and closer to home HSBC, Santander and Astra-Zeneca will be reporting.

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Sunday night, the Euro crashes:

(courtesy zero hedge)

Euro Suddenly Crashes On No News

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Unbelievable!!

(courtesy zero hedge)

Not Again! US Trained Syrian “Moderates” Surrender To Jihadists – Hand Over Heavy Weapons

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West Texas Intermediate oil plunges to a 29 month low;

(courtesy zero hedge)

WTI Tumbles To 29-Month Lows After Saudi Price Cut

After initially jerking higher after Saudi Arabia released its new ‘lower-prices-for-the-US’ strategy, it appears the market began to realize that in fact – as we warned –Saudi Arabia may be willing to accept prices “lower for longer.” WTI futures are trading below $78.50 – the lowest since June 2012 (and its dragging Trannies lower today)…

As Bloomberg reports, confirming our note over the weekend,

Saudi Arabia, the world’s biggest oil exporter, is telling the market it won’t cut output to lift crude back to $100 a barrel and that prices must fall further before it does so, according to consultant FACTS Global Energy.

Swelling supplies from non-OPEC producers drove Brent crude into a bear market on Oct. 8 amid waning demand from China, the world’s second-largest importer. The Organization of Petroleum Exporting Countries meets Nov. 27 to consider changing its production target in the face of the highest U.S. crude output in almost 30 years.

“Production of shale oil in the U.S. will not be hit as hard as the Saudis think” by the price decline, FGE Chairman Fereidun Fesharaki said at a conference today in Doha, Qatar. Producers in the U.S. “can withstand a lot of pressure” by reining in their operating costs before they curb investment in new wells and production, he said.

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The death of the Petrodollar:

(courtesy zero hedge)

How The Petrodollar Quietly Died, And Nobody Noticed

Two years ago, in hushed tones at first, then ever louder, the financial world began discussing that which shall never be discussed in polite company – the end of the system that according to many has framed and facilitated the US Dollar’s reserve currency status: the Petrodollar, or the world in which oil export countries would recycle the dollars they received in exchange for their oil exports, by purchasing more USD-denominated assets, boosting the financial strength of the reserve currency, leading to even higher asset prices and even more USD-denominated purchases, and so forth, in a virtuous (especially if one held US-denominated assetsand printed US currency) loop.

The main thrust for this shift away from the USD, if primarily in the non-mainstream media, was that with Russia and China, as well as the rest of the BRIC nations, increasingly seeking to distance themselves from the US-led, “developed world” status quo spearheaded by the IMF, global trade would increasingly take place through bilateral arrangements which bypass the (Petro)dollar entirely. And sure enough, this has certainly been taking place, as first Russia and China, together with Iran, and ever more developing nations, have transacted among each other, bypassing the USD entirely, instead engaging in bilateral trade arrangements, leading to, among other thing, such discussions as, in today’s FT, why China’s Renminbi offshore market has gone from nothing to billions in a short space of time.

And yet, few would have believed that the Petrodollar did indeed quietly die, although ironically, without much input from either Russia or China, and paradoxically, mostly as a result of the actions of none other than the Fed itself, with its strong dollar policy, and to a lesser extent Saudi Arabia too, which by glutting the world with crude, first intended to crush Putin, and subsequently, to take out the US crude cost-curve, may have Plaxico’ed both itself, and its closest Petrodollar trading partner, the US of A.

As Reuters reports, for the first time in almost two decades, energy-exporting countries are set to pull their “petrodollars” out of world markets this year, citing a study by BNP Paribas (more details below). Basically, the Petrodollar, long serving as the US leverage to encourage and facilitate USD recycling, and a steady reinvestment in US-denominated assets by the Oil exporting nations, and thus a means to steadily increase the nominal price of all USD-priced assets, just drove itself into irrelevance.

A consequence of this year’s dramatic drop in oil prices, the shift is likely to cause global market liquidity to fall, the study showed.

This decline follows years of windfalls for oil exporters such as Russia, Angola, Saudi Arabia and Nigeria. Much of that money found its way into financial markets, helping to boost asset prices and keep the cost of borrowing down, through so-called petrodollar recycling.

But no more: “this year the oil producers will effectivelyimport capital amounting to $7.6 billion. By comparison, they exported $60 billion in 2013 and $248 billion in 2012, according to the following graphic based on BNP Paribas calculations.”

In short, the Petrodollar may not have died per se, at least not yet since the USD is still holding on to the reserve currency title if only for just a little longer, but it has managed to price itself into irrelevance, which from a USD-recycling standpoint, is essentially the same thing.

According to BNP, Petrodollar recycling peaked at $511 billion in 2006, or just about the time crude prices were preparing to go to $200, per Goldman Sachs. It is also the time when capital markets hit all time highs, only without the artificial crutches of every single central bank propping up the S&P ponzi house of cards on a daily basis. What happened after is known to all…

“At its peak, about $500 billion a year was being recycled back into financial markets. This will be the first year in a long time that energy exporters will be sucking capital out,” said David Spegel, global head of emerging market sovereign and corporate Research at BNP.

Spegel acknowledged that the net withdrawal was small. But he added: “What is interesting is they are draining rather than providing capital that is moving global liquidity. If oil prices fall further in coming years, energy producers will need more capital even if just to repay bonds.”

In other words, oil exporters are now pulling liquidity out of financial markets rather than putting money in. That could result in higher borrowing costs for governments, companies, and ultimately, consumers as money becomes scarcer.

Which is hardly great news: because in a world in which central banks are actively soaking up high-quality collateral, at a pace that is unprecedented in history, and led to the world’s allegedly most liquid bond market to suffer a 10-sigma move on October 15, the last thing the market needs is even less liquidity, and even sharper moves on ever less volume, until finally the next big sell order crushes the entire market or at least force the [NYSE|Nasdaq|BATS|Sigma X] to shut down indefinitely until further notice.

So what happens next, now that the primary USD-recycling mechanism of the past 2 decades is no longer applicable? Well, nothing good.

Here are the highlights of David Spegel’s note Energy price shock scenarios: Impact on EM ratings, funding gaps, debt, inflation and fiscal risks.

Whatever the reason, whether a function of supply, demand or political risks, oil prices plummeted in Q3 2014 and remain volatile. Theories related to the price plunge vary widely: some argue it is an additional means for Western allies in the Middle East to punish Russia. Others state it is the result of a price war between Opec and new shale oil producers. In the end, it may just reflect the traditional inverted relationship between the international value of the dollar and the price of hard-currency-based commodities (Figure 6). In any event, the impact of the energy price drop will be wide-ranging (if sustained) and will have implications for debt service costs, inflation, fiscal accounts and GDP growth.

Have you noticed a reduction of financial markets liquidity?

Outside from the domestic economic impact within EMs due to the downward oil price shock, we believe that the implications for financial market liquidity via the reduced recycling of petrodollars should not be underestimated.Because energy exporters do not fully invest their export receipts and effectively ‘save’ a considerable portion of their income, these surplus funds find their way back into bank deposits (fuelling the loan market) as well as into financial markets and other assets. This capital has helped fund debt among importers, helping to boost overall growth as well as other financial markets liquidity conditions.

Last year, capital flows from energy exporting countries (see list in Figure 12) amounted to USD812bn (Figure 3), with USD109bn taking the form of financial portfolio capital and USD177bn in the form of direct equity investment and USD527bn of other capital over half of which we estimate made its way into bank deposits (ie and therefore mostly into loan markets).

The recycling of petro-dollars has benefited financial markets liquidity conditions. However, this year, we expect that incremental liquidity typically provided by such recycled flows will be markedly reduced, estimating that direct and other capital outflows from energy exporters will have declined by USD253bn YoY. Of course, these economies also receive inward capital, so on a net basis, the additional capital provided externally is much lower. This year, we expect that net capital flows will be negative for EM, representing the first net inflow of capital (USD8bn) for the first time in eighteen years. This compares with USD60bn last year, which itself was down from USD248bn in 2012. At its peak, recycled EM petro dollars amounted to USD511bn back in 2006. The declines seen since 2006 not only reflect the changed  global environment, but also the propensity of underlying exporters to begin investing the money domestically rather than save. The implications for financial markets liquidity – not to mention related downward pressure on US Treasury yields– is negative.

* * *

Even scarcer liquidity in US Capital markets aside, this is how BNP sees the inflation and growth for energy exporters:

Household consumption benefits: While we recognise that the relationship is not entirely linear, we use inflation basket weights for ‘transportation’ and ‘household & utilities’ (shown in the ‘Economic components’ section of Figure 27) as a means to address the differing demand elasticities prevalent across countries. These act as our proxy for consumption the consumption basket in order to determine the economic benefit that would result as lower energy prices improve household disposable income. This is weighted by the level of domestic consumption relative to the economy, which we also show in the ‘Economic components’ section of Figure 27.

Reduced industrial production costs: Outside the energy industry, manufacturers will benefit from falling operating costs. Agriculture will not benefit as much and services will benefit even less.

Trade gains and losses: Lost trade as a result of lower demand from oil-producing trade partners will impact both growth and the current account balance. On the other hand, better consumption from many energy-importing trade partners will provide some offset. The percentage of each country’s exports to energy producing partners represents relative to its total exports is used to determine potential lost growth and CAR due to lower demand from trade partners.

Domestic FX moves are beyond the scope of our analysis. These will be tied to the level of openness of the economy and the impact of changed demand conditions among trade partners as well as dollar effects. Neither do we address non-oil related political risks (eg sanctions) or any fiscal or monetary policy responses to oil shocks.

GDP growth

The least impacted oil producing country, from a GDP perspective, is Brazil followed by Mexico, Argentina, Tunisia and Trinidad & Tobago. The impact on fiscal accounts also appears lower for these than most other EMs.

Remarkably, the impact of lower oil for Russia’s economic growth is not as severe as might be expected. Sustained oil at USD80/bbl would see growth slow by 1.8pp to 0.6%. This compares with the worst hit economies of Angola (where growth is nearly 8pp lower at -2%), Iraq (GDP slows to -1.6% from 4.5% growth), Kazakhstan and Azerbaijan (growth falls to -0.9% from 5.8%).

For a drop to USD 80/bbl, it can be seen (in Figure 27) that, in some cases, such as the UAE, Qatar and Kuwait, the negative impact on GDP can be comfortably offset by fiscal stimulus. These economies will probably benefit from such a policy in which case our ‘model-based’ GDP growth estimate would represent the low end of the likely outcome (unless a fiscal policy response is not forthcoming).

Global growth in 2015? More like how great will the hit to GDP be if oil prices don’t rebound immediately?

On the whole, we can say that the fall in oil prices will prove negative, shaving 0.4pp from 2015 EM GDP growth. The collective current account balance will fall 0.58pp to 0.6% of GDP, while the budget deficit will deteriorate by 0.61pp to -2.9%. This probably has the worst implications for EM as an asset class in the credit world.

Energy exporters will fare worst, with growth falling by 1.9pp and their current account balances suffering negative pressure to the tune of 2.69pp of GDP. Budget balances will suffer a 1.67pp of GDP fall, despite benefits from lower subsidy costs. The impact of oil falling USD 25/bbl will be likely to put push the current account balance into deficit, with our analysis indicating a 0.3% of GDP deficit from a 2.4% surplus before. Fortunately, the benefit to inflation will be the best in EM and could help offset some of the political risks from reduced growth.

As might be expected, energy importers will benefit by 0.4pp better growth in this scenario. Their collective current account will improve by 0.6pp to 1.1% of GDP.

The regions worst hit are the Middle East, with GDP growth slowing to 0.3%, which is 3.8pp lower than when oil was averaging USD105/bbl.The regions’ fiscal accounts will also suffer most in EM, moving from a 1.7% of GDP surplus to a 1.8% deficit. Meanwhile, the CAB will drop 5.3pp, although remain in surplus at 3.9%. The CIS is the next-worst hit, from a GDP perspective, with regional growth flat-lined versus 1.91% previously. The region’s fiscal deficit will worsen from 0.7% of GDP to -1.8% and CAB shrink to 0.7% from 3% of GDP. Africa’s growth will come in 1.4pp slower at 2.8% while Latam growth will be 0.4pp slower at 2.2%. For Africa, the CAB/GDP ratio will fall by 2.4pp pushing it deep into deficit (-2.9% of GDP).

Some regions benefit, however, with Asia ex-China growing 0.45bpp faster at 5.5% and EM Europe (ex-CIS) growing 0.55pp faster at 3.9%, with the region’s CAB/GDP improving 0.69pp, although remain in deficit to the tune of -2.4% of GDP.

* * *

And so on, but to summarize, here are the key points once more:

• The stronger US dollar is having an inverse impact on dollar-denominated commodity prices, including oil. This will affect emerging market (EM) credit quality in various ways.
• The implications of reduced recycled petrodollars has significant ramifications for financial markets, loan markets and Treasury yields. In fact, EM energy exporters will post their first net drain on global capital (USD8bn) in eighteen years.
• Oil and gas exporting EMs account for 26% of total EM GDP and 21% of external bonds.For these economies, the impact will be on lost fiscal revenue, lost GDP growth and the contribution to reserves of oil and gas-related export receipts. Together, these will have a significant effect on sustainability and liquidity ratios and as a consequence are negative for dollar debt-servicing risks and credit ratings.

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