Optimistic on world share markets despite commodity slump

THE poor start to 2016 by world share markets has continued into February, although without wanting to administer the kiss of death, I note the situation has improved a little in the past week or so.

The health of corporate balance sheets has moved up the worry list and led to a sell-off in corporate bonds - particularly high yield or "junk" bonds in the US and Europe - and raised fresh concerns about the health of the banking system, particularly in Europe.

The prolonged period of extraordinarily low interest rates across the globe has encouraged many companies to carry higher levels of debt - sometimes higher than prior to the Global Financial Crisis.

A lot of the focus has been on commodity-related companies - particularly in energy, where balance sheets are under a huge amount of stress. Few if any of these companies appear to have expected oil prices to fall so far.

Whether all this is just financial markets having another extended tantrum, or they are telling us things economists haven't caught on to yet, is an open question. So far, the economic news - about real things such as employment and production - still look okay.

However, most of the economic numbers are ancient history as far as markets are concerned.

Financial markets don't always give reliable signals about economic prospects, but they are more forward looking than any economist, journalist or most published economic data.

There are still reasons for optimism. Weaker commodity prices have at least as much to do with excess supply as weaker demand.

They aren't necessarily a sign of a much weaker world economy.


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