Basically the middle east is heading into credit contagion, which means the longer there is uncertainly in that region, i.e civil unrest/political turmoil, credit spreads will widen and the costs to insure sovereign debt will blow out too. With Egypt's CDS spread widening to 4%, at the cost of $440,000 on 10 million (Sovereign Debt), at this point one has to expect, even with a possible China inflation crash scenario, that has spooked markets in the last week (note oil/gold under pressure). A follow on from China's inflation issue is the serious problems now occurring in the middle east, this will then feed back into the inflation problems of Asia/China etc. We are now in a extreme economic game changer, with oil/food prices spiking. Further oil prices may cause China to react. How? Well, if the US continues on a path of US dollar deprecation, China will force the interest rate hand and sell US Treasury's. They will do this quickly and spike up USD's and UST yields, with the 10yr going well over 5%, and a pressure the US fiscal policy to tighten. This will be forced upon the US by China.
As discussed in
Oil on a 25mth cyclical bull run, China is a net importer of oil, that and they are hall-marks of hyper inflation ( eg tea price one week is a certain price, next week it goes up again). Oil (WTI) starts to head towards $95, at any case over $90, it will be a breaking point for China in it's inflation dilemma.
The other option? China crashes a potion of it's economy, say housing.
In the meantime, oil is going upward.
Note the narrowing Brent/WTI spread
No comments:
Post a Comment