Although cheap oil is both a symptom of the problems in the economy and one of the ways of its recovery, the decline in prices still pushes down stock indices. Investors now consider oil as an indicator of financial markets condition. And so far, the conclusion is that the world is not yet on a firm basis of recovery.
We saw that the recovery of stock markets last week was stalled at the signs of a steady decline in oil prices. But it is even worse than gold prices are also rolling back from highs, and the dollar index is moving up. This combination of market reactions was observed in mid-March, amid extreme collapses. It is explained by the lack of liquidity in the markets when the value of cash is growing many times everywhere, as they can both pay off debts and buy goods and services.
Previously, it was believed that the Japanese yen beat the dollar during such periods of widespread deleveraging. However, in the second decade of March – when there were historically extreme market movements – demand for the dollar exceeded everything else. If we see a new phase of this movement, we should not focus on the yen as an indicator of security demand. The dollar may immediately become a market leader, while oil and gold will be under short-term but intense pressure.