Monday, 18 January 2016

Sanctions lifted on Iran sends oil bulls scattering

Sanctions which have been placed on Iran for almost a decade have been lifted following an announcement by the International Atomic Energy Agency that an inspection had been conducted in the country and has received thumbs up which gave oil bears added momentum in their latest ditch to bury all hopes of seeing a price recovery this year in "black gold."

The deal allows Iran to begin trade relations with the world once again after a hiatus that saw them being shutout and foreign reserves drawn down to the point of extinction. The nation's main contributor to the trade balance equation is oil which makes up a large amount of exports highlighting the reliance Tehran has in sourcing foreign receipts to fund payments.

However policymakers will have their hands full with how the plan to deal with the situation which I'm sure will start developing on the ground , mostly amongst foreign companies who have had their profits locked up waiting for a deal to be struck. Given the amount of companies waiting to repatriate, it will still be a while before we see any significant capital flow beginning to materialise as the nation would need to replenish reserves which does take time, probably buying some time for policymakers to think of a strategy going forward.

Since the price of oil is much further than what it was a year ago, it requires more barrels of oil to fund the same amount of foreign reserves meaning that the glut being experienced may become worse if the Iranian government wishes to pursue an accelerated program of allowing capital to flow out. I can't envision this to be the case because no country, especially one that has suffered from 10 years of economic suppression wants to see money flowing out at a rapid pace.

But at the same time it wouldn't help boost confidence in the Arab nation who would do well attracting foreign investment coming off the constructive negotiations with the UN and the rest of the world in making concessions to scale back its ability to produce nuclear weapons. These negotiations have proven to the international community that Iran is serious about changing negative perceptions that may have been formed after previously defying international protocol.

The most likely option taken by Iranian authorities would be to allow funds to flow outwards in a piecemeal process so as to allow a level of stability to be found but wouldn't be too pleasing for foreign owned companies.

The next few years ahead will be a difficult and bumpy road for Iran but if they survive this period it could prove fruitful for them going forward. By this time the oil price may have reached a better price for which it can be sold and the nation can continue on its road to prosperity hopefully to the betterment of all.  
The US Fed find it seemingly harder to implement a solid interest rate hike pathway

Following on from the story mentioned above and going back two weeks ago when I had written what the implications of an interest rate hike meant for the entire global financial system I think what we've seen unfolding in the trading days gone past so far is exactly why I don't believe that the Fed will be steadfast on their forecasts on lifting interest rates at such an ambitious pace as they had laid out at the December meeting when the first rate hike in ten years had been announced.

The reliance on the US economy to produce the beacon of light for the global economy is gathering momentum as the world grapples economic crises that don't seem to be stopping as the list grows longer and new situations appear, showcasing the weakness within the entire world economy.

The question of the steadiness regarding the transition between swapping roles as leading economy between the US and China had always been on the top of everyone's mind however given such lacklustre growth stemming from the US and the severity in the contraction in China's growth activity the world now faces greater problems with one being emerging markets. These economies had found favour with the developed world's investors but have since left much to be desired as their mainstay remains under economic difficulty.

The Fed is now placed in the position where they don't want to let out the little flame that they have created from the trillions of dollars created but at the same time try normalize the state of the interest rate market so that they don't form a trend of having to use low interest rates in years to come. However at the same time, the stronger dollar is hampering emerging market economies who have built up copious amounts of debt over the years and thus a bubble of substantial proportion is building that could trigger a new financial crisis.

When those praising the good quantitative easing had done in saving financial markets were heard making such statements, it was a rather short sighted approach in their assessment with only one phase fully being implement, the next stage has begun and the dark clouds on the horizon that will truly test the validity of such a measure.  
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