Riblet#15: The Tangled Web We Weave

Change, uncertainty, lack of knowledge, inter-connectedness, dependency, complexity –  all of these bring risk, and it appears that we currently have a super-abundance of all of them.

When a big event happens or a big change occurs, then the immediate risks may well be obvious, but that may not give you the full picture.Oil prices have crashed this week after Saudi Arabia launched a price war, apparently to win new customers and also to threaten the viability of higher cost producers.  Coronavirus compounded the situation and reporting of the share price falls seems to entangle the two issues. 

Those issues led to share prices plummeting on Monday, with falls similar to those last seen during the last financial crisis. The currencies of major oil producers such as Canada and Norway experienced a sudden drop in value.  The yields on government bonds (often seen as a safe haven) also dropped.

The Saudi increase in supply, coupled with discounts, comes at a time of reduced demand owing to coronavirus, so the impact is augmented for the higher cost producers through lower price and lower demand.  

Looking further, American shale-oil producers are heavily indebted, so the ability to pay their interest charges or to renew their loans may evaporate, and thus risk increases for their creditors – this may be the one that hurts most as it comprises a significant proportion of the US bond market.

But then on Tuesday, share prices rallied in a surge of optimism, mostly it seems due to Xi Jin Ping’s visit to Wuhan and some announcements of stimulus packages in the West. One Japanese stockbroker said that there was “a thin semblance of sanity in the market…but it’s very thin indeed”, and indeed the rebound appears to have fizzled out on Wednesday.

The tangled inter-connections here, coupled with volatility, uncertainty and plain lack of understanding will conceal further risks; those who can get to untangle them may gain advantage for themselves and for their organisations.

Data Source:The Financial Times

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