Monday 1 December 2014

Stock market rally may turn into bubble as oil falls

Global stocks mostly continued their rally in November even as oil extended its slump.

The positive performance of stocks is reflected in the MSCI All-Country World Index, which rose 1.5 percent last month.

Driving the rise in stocks were the United States and European markets. The Standard & Poor's 500 Index rose 2.5 percent and the STOXX Europe 600 Index jumped 3.1 percent.

In contrast, Asian stocks fell. The MSCI All-Country Asia Pacific Index fell 0.8 percent in November.

Stocks were boosted by a cut in interest rates by the People's Bank of China last month as well as suggestions by European Central Bank President Mario Draghi that it may increase monetary stimulus.

In contrast to stocks, oil prices plummeted in November, declining for the fifth consecutive month.

West Texas Intermediate oil fell 18 percent last month, the largest one-month percentage decline since December 2008. It fell 10 percent on Friday to close at its lowest since September 2009 after the Organization of the Petroleum Exporting Countries announced that it was keeping its production ceiling unchanged.

Brent crude oil also finished the month down 18 percent.

John Authers at the Financial Times thinks that falling oil prices could stoke a stock market bubble.

Authers wrote that cheaper oil provides a boost to the economy while lowering inflation. The latter in turn allows central banks to keep monetary policy loose.

“So if Opec will not act to keep a floor under the oil price,” he wrote, “this certainly stokes the risk that the current rally in the US stock markets carries on until it boils over into a bubble.”

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