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Mint update| Markets shellacked as oil shock looms

Mint update| Markets shellacked as oil shock looms
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First Published: Thu, Feb 24 2011. 09 32 PM IST

Updated: Thu, Feb 24 2011. 09 32 PM IST
Want a weather prediction like tool for the stock markets? Track google searches. A Business Insider study found that a spurt in Nouriel Roubini’s popularity on the web was mostly followed by a decline in US stocks.
What does the man himself say? In the magnificently titled “Middle East Turmoil and Contagion: A Geoeconomic Tsunami for the Global Economy?” he writes
If oil prices rise much further, these (developed) economies would slow sharply and some might even experience a double-dip recession. Stagflationary pressures are already building in the UK.
Also See | Markets slip on oil slick (Graphic)
Brent crude reached boiling hot levels of near $120 a barrel as a civil war in Libya threatens to cut off supplies. Subsequently, it cooled off a bit and is trading at $114.58, still 3% up from the previous close
Roubini continues:
This could, in darker scenarios, tip part of the global economy into stagflation, a combination of rising inflation and recession. It will certainly increase inflation and reduce growth in energy- and commodity-importing countries.
Energy hungry and import-dependent India will suffer heavily in such a scenario. Not only are the fiscal deficit and current account deficit at ugly levels, a rise in crude prices will leave the government with tough choice of subsidies vs inflation. Every $1 per barrel increase in oil prices leads to the trade deficit worsening by $700million or a fifth of one percent of GDP.
Citigroup Global Markets has come out with a report trying to figure out what would happened in the case of an oil price shock. Naturally, the prognosis is grim for India.
The report says:
Fiscal risk arising from oil price shocks appears greatest in India and Pakistan where debt and deficits are already very high to begin with and do not have sufficient offsetting oil revenues to provide a cushion.Taking into account trends in oil intensities over time, we would need to see an average Brent oil price of around $120-125/bbl in 2011, for the magnitude of the oil shock for Asia to reach 2008 proportions of around 2.3% of GDP, when oil prices averaged around $98/bbl. India and Korea could see relatively larger shocks vs 2008 and 1980 levels.
Those levels are very near now.
Sensex 17632.41 , æ3%
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First Published: Thu, Feb 24 2011. 09 32 PM IST
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