Three Strikes

Emerging markets were also a disproportionate loser Wednesday, with the MSCI EM Index of equities tumbling 5.11%. That brings its decline from this year’s high in April to 9.70%. It’s also down 22.2% from last year’s high in January, a far steeper drop than the 7.68% decline in the MSCI All-Country World Index. And according to the strategists at Citigroup, the outlook for emerging markets doesn’t look much better. They say estimates of potential growth in these economies are being “overestimated,” and cite three big-picture drivers that are likely to weigh on emerging markets going forward. The first is a slower increase in the global population, which had helped spur growth. The second is that globalization, which broke down trade barriers and opened up foreign direct investment, has peaked. The third is that China, “whose era of rapid, investment-led growth triggered a surge in demand for commodities and intermediate goods,” is slowing, the Citigroup strategists wrote in a report Wednesday. Come to think of it, those worries could also apply to the commodities market, which has been under pressure itself. The Bloomberg Commodity Index fell on Wednesday to bring its decline from last year’s high in May to more than 15%.

Crude Is Flowing

The oil market has a mismatch problem: too much supply and not enough demand. West Texas Intermediate futures fell to an eight-week low of $52.52 a barrel on Wednesday. The drop came as the U.S. Energy Information Administration said America’s oil stockpile rose by 3.1 million barrels last week. The increase exceeded the median forecast from analysts and was the biggest rise since May, according to Bloomberg News’s Catherine Ngai. But it’s not just the U.S. where oil is flowing freely. Bloomberg News also reports that Russia’s average daily oil output exceeded its OPEC+ target in September, even after producers made deeper cuts from a month earlier. The country pumped 46 million tons of crude and condensate, according to preliminary data from the Energy Ministry’s CDU-TEK unit. That equals a daily average of 11.25 million barrels, based on the standard 7.33 barrels-per-ton conversion ratio, and it means Russia produced 60,000 barrels a day more than its OPEC+ cap. Ecuador said Tuesday it will quit OPEC in January, breaking away so that it can boost oil revenue and not be restrained the group’s production curbs. The upside to lower energy prices is they will support the global economy rather than act as a counterweight like they did heading into the Great Recession, when prices surged from less than $60 a barrel in 2007 to more than $140 in 2018.

Tea Leaves

The disappointing results in the ISM manufacturing index Tuesday raises the stakes for the group’s measure of the services sector due out Thursday. That gauge, which is seen a as proxy for the consumer, is seen holding at a relatively strong level for September, with the median estimate of economists surveyed by Bloomberg being 55.1, down slightly from the 56.4 reading in August. The measure is a diffusion index, meaning that anything above 50 signals expansion, and anything below 50 marks a contraction. “Thursday’s ISM Non-Manufacturing print will be a crucial test for the steep drop in (bond) yields to start October,” the rates strategists at BMO Capital Markets wrote in a research note. “After all, even if we’re in a global manufacturing recession, this need not cause a synchronized contraction.”

This article was provided by Bloomberg News.

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