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From oil to the dollar, today is another wild economic ride

March 17: It’s a rip-roaring day of volatility, crisis, and speculation – might as well wash it down with a St. Patty’s day beer


 

MORNING-PLAYBOOK-STORY

Once again, oil is going low, low, low.

After speculation the price of oil had stabilized around $50, the price of West Texas Intermediate – the U.S. benchmark – is once again on a precipitous slide, as it becomes clear just how much oil the U.S. is producing. So much, in fact, that they are running out of storage space. This morning, the price has been inching down, and is currently at $43.14.

The other major forces at work this week are the rise of the U.S. dollar, which last week hit a 12-year-high against the swiftly weakening euro, and the lead-up to the Fed’s interest-rate announcement tomorrow, which is expected to disperse guarded hints on when an interest-rate hike could come (many are saying June.) Speculation drove a global equity sell-off last week, on worries that a hike could cool down the world’s main economic star, as many other countries are struggling either with deflation or, in the case of countries including Brazil, Ukraine and Venezuela, extreme inflation.

In Europe, following the European Central Bank’s first rounds of bond-buying last week, as part of a 1.1-trillion euro quantitative easing program, there are signs that the eurozone as a whole is turning a corner (as ECB president Mario Draghi boldly claimed before the QE program had even begun.) While the zone is still seeing deflation, numbers released this morning show the rate appears to be half what it were in January (at 0.3 per cent), as last quarter’s employment rate ticked up 0.1 per cent, confirming recent monthly numbers that show unemployment has actually slipped to its lowest in a couple of years. Meanwhile, Germany’s main stocks index, the Dax, hit a new record yesterday.

Is optimism in order? (No. Did you see the price of oil?) Besides, there’s also the problem of Greece, as the country’s cash situation is still a mess – and it now faces yet another deadline for debt repayments, with unclear proposals on where it’s going to get the money. Meanwhile, Brazil is also facing a political and economic crisis: amidst soaring inflation and massive protests against the government, which was only re-elected last year, the ruling party’s treasurer has been charged over sprawling corruption revelations involving the country’s state oil company.

There’s little planned on the calendar today, besides housing starts for the U.S., but keep your eyes trained on oil and the greenback. Also: Happy St. Patrick’s Day!

What exactly is Greece’s plan? If you’ve been following Greece’s cash woes, this might be your main question. (It’s certainly mine.) You’re not alone. The German finance minister, Greece’s chief critic, summed it up with some harsh words (on Bloomberg): “None of my colleagues, or anyone in the international institutions, can tell me how this is supposed to work,” Wolfgang Schaeuble said. He was referring to the government’s assurances they will meet their debt obligations, another round of which is due this week, as well as paying domestic salaries – despite having limited access to cash or short-term loans from the ECB, which has tied the latest round of funds to economic reforms. Another analyst, at the Brookings Institution, also said it: “The impression given is that there’s no plan A or plan B. There’s nothing.” The government says it has a plan; no one seems to know what that plan is.

Who goes bankrupt when the value of the dollar rises? Sugar producers in Brazil, Chinese real estate developers, and Indian utility companies, according to the New York Times’ Upshot blog. We talk a lot about what happens to the loonie and Canadian exports as the dollar rises, but as businesses in emerging markets have increasingly taken on loans in U.S. dollars, they’ve also taken on a game of “Russian roulette.” As the value of the dollar has risen by about a quarter against a standard currency basket, those debt obligations have suddenly risen. Neil Irwin notes that exporters can make it work, if their revenues are also in USD, but the rise underscores a great constant of the global economy that is so obvious it bears repeating: when the Fed meets to discuss monetary policy, they are looking at the American economy – but when it comes to the dollar, the rest of the world is along for the ride.

The end of poverty – and the limits of prosperity. In “The mysterious disappearance of poverty”, Scott Gilmore of Maclean’s takes stock of the rise of global incomes, and how much global poverty has been reduced (despite what he says is the limited usefulness of golden-bullet development strategies like micro loans). But the BBC also takes on some of the time-old contradictions of the idea that wealth can keep increasing forever – and therefore lift everyone out of poverty. This includes the idea that – even disregarding climate change entirely, which is nonetheless at the heart of the matter – massive growth has limits within physics: according to a physicist named Tom Murphy at the University of California, within 400 years, a three per cent yearly growth rate would produce so much heat, just as a byproduct of energy production, that “we would actually be boiling the oceans.”

Pinterest is valued at $11 billion. The site, which you will know if you’ve ever been anywhere near wedding preparations, is used to bookmark photos online, and has raised lots and lots of cash, following the lead of other tech stars like Snapchat in eschewing an IPO as the money keeps rolling in.

Guinness wants it to be St. Patty’s Day all year long. The celebration is a stable for the brand behind the ubiquitous Irish brew – in the U.S., it sells twice as much beer in March than any other month, and sales generally quadruple on the Irish partying holiday. But like so many heritage brands, it has seen its market share shaken by changing tastes, including the rising popularity of smaller craft beers, lower pub attendance in the U.K., and a reluctance to drink a heavy pint in the summer. In response, the brand is expanding into lighter beers and hosting soccer matches in the U.S. But there’s one place where its appeal remains strong, even when it’s warm: a third of the brand’s sales come from Africa.

Need to know: 

TSX: 14,862.76 (+131.26), Monday
Loonie: 78.25 (+0.06), Monday
Oil (WTI): $43.14, Tuesday (7:00 a.m.)


 

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