uploads///The SP  Index Recovered With The Help of XME USO

Is Citi’s ‘Death Spiral’ Unwinding?


Mar. 15 2016, Published 8:50 a.m. ET

Citi’s ‘death spiral’

The global economy (ACWI) seems stuck in a “death spiral,” according to a statement made by Citi strategists (C) on February 5, 2016. They said it could lead to a further downside in oil prices, a recession, and a serious equity bear market. Weaker commodity and oil prices, a strong US dollar, and slowing global growth in both emerging and developed markets are the major factors behind this so-called death spiral.

However, macro strategists at Citi also forecast that the US dollar would weaken in 2016. On a year-to-date basis, the dollar index (UUP) declined by 2.6%. This came after Federal Reserve chair Janet Yellen’s statement in mid-February about being more cautious with the gradual rate hike process.

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What’s China doing?

The recent step taken by the People’s Bank of China (or PBoC) and the fall in the US dollar index helped commodity prices recover from their multiyear lows. The PBoC said on Monday, February 29, 2016, that it has cut its reserve requirement ratio by 0.5 percentage points, or 50 basis points.

The movement in metals stocks came with speculation about more easing from the PBoC for boosting growth in the slowing Chinese economy (FXI) (YINN). The G20 (Group of 20) discussions in Shanghai on February 27, 2016, also provided a positive impact on commodities. The discussions included stabilization of the financial market. They also suggested that China should not further devalue its currency. If growth in the Chinese economy picks up, then the domestic demand for commodities will also increase. With this expectation, most of the commodity stocks and energy stocks continued their rally.

In the next part of this series, we’ll look at the commodity index and CPI (consumer price index) and PPI (producer price index) levels in the United States (QQQ) (SPY) (VOO).


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