Hence BP gained 3
Hence, BP gained 3.75p to 422.75p, Shell added 4.25p to 386p and BG ticked 3.5p higher to 260.75p. Elsewhere, mm02 gained 0.5p to 60.25p as Investec Securities upgraded its full-year earnings forecast ahead of Monday’s trading statement from the mobile phone group. The jump in the price of crude followed a surprise decision by Opec to cut oil supplies. The cartel decided to reduce output by 10 members – excluding Iraq – by 900,000 barrels a day, which is very bad news for chemical companies such as ICI which use oil as a raw material and as a consequence will see their cost bases rise.However, Opec’s decision, and the subsequent rise in the price of crude, is great news for the oil sector. Business has been declining gradually since the end of the first quarter, and no upturn is in sight,” the broker said after its meeting with Clariant.
Such comments hit sentiment towards ICI, which ended the day 5p lower at 167.75p.Also weighing on ICI’s share price was the rise in the price of oil. But there is a possibility of serious trouble and things will not feel more comfortable until the US current account starts heading back a little way towards the black again.. There is a disturbing lack of urgency and humility in the eurozone: leaders don’t like admitting that the euro might actually be part of the problem, despite the fact that large parts of the Continent self-evidently have the wrong exchange rate.It would be a good reality check were the euro to rise sharply and export growth be choked off, for it might force European leaders to take seriously the notion that domestic demand has to be encouraged.As for China, expect nothing except polite words and you will not be disappointed. My concern is that the leadership has so many problems to wrestle with that it is not able to devote sufficient space of mind to the problems of a trade surplus with America.If all these US companies come and build plants in China, where, they might ask, does America expect the products to go? The difficulty is that individual corporate decisions to cut production costs by sourcing from China have a collective impact on the US, which those businesses cannot take into consideration.None of this means that there is disaster ahead. There is a small danger of an over-rapid decline, which, were it to happen, would be deeply dangerous to world trade.To avoid any such danger two things have to happen.
One is that Europe and Japan follow growth-oriented policies. The yen? Well, yes, but there are big risks there that the artificially low long-term rates may rise sharply.Sterling? That will, if past performance is any guide, trade between the dollar and the euro, so it is not really much of a hedge. East Asian currencies, including the renminbi? Can’t get into them as the markets are too small.Put all this together and the balance of probability is that there will be some shading down of the dollar over the next couple of years. Portfolio investment, too, may recover, as it becomes almost certain that the bottom of the present equity cycle was last October.
Cheaper oil will help a lot (right hand graph).Besides, if you don’t like the dollar, where else do you go? The euro would be the obvious candidate and in the short term it may well strengthen somewhat. But that may push the European Central Bank into another cut and may push the eurozone’s nascent modest recovery back into stagnation. Not Europe, already teetering on the edge of recession; not Japan, at last managing a little growth; and certainly not China.In any case there are other reasons for non-US nationals to invest in the US. That surge has an important side-effect: businesses elsewhere need to know how the US does it and accordingly need to maintain their investment in the US. It is also clear why the dollar has not fallen further already. The reason has been the flood of foreign funds into US Treasury securities, with non-nationals now holding 20 per cent of the total stock of official debt.But before you conclude that this cannot continue and the dollar must fall sharply, remember that it is not in the self-interest of anyone outside the US to see that happen. Japan was a member of the G5, as it then was, at Plaza.So what can sensibly be said? There is no doubt of the bearish mood of the exchanges.
