The global business cycle and speculative demand for crude oil

PurposeThis paper aims to better understand if speculative activity is a factor or even the main factor in the run-up of oil prices in the spot market, particularly in the recent price bubble that occurred in the period from mid-2003 to 2008.Design/methodology/approachThe methodology used is based on an existing vector autoregressive model proposed by Kilian and Murphy (2014), which is a structural model of the global market for crude oil that accounts for flow demand and flow supply shocks and speculative demand oil shocks.FindingsFrom the output of the authors’ structural model, the authors ruled out speculation as a factor of rising oil prices. The authors have found instead that the rapid oil demand caused by an unexpected increase in the global business cycle is the most accurate culprit. Despite the change of perspective in the speculative component, the authors’ conclusions concur with the findings of Kilian and Murphy (2014) and others.Originality/valueAs far as the authors are aware, this is the first time that a study has used as a spread oil variable, a speculative component of the real price, replacing the oil inventories considered by Kilian and Murphy (2014). Another contribution is that the model used allows estimating traditional oil demand elasticity in production and oil supply elasticity in spread movements, casting doubt on existing models with perfect price-inelastic output for crude oil.

Determinants of Speculative Demand of Wheat and Its Impact on Consumer Welfare Loss

A much-neglected concept of price speculation from the side of consumers plays an important role in the determination of prices and quantity traded in the market. Almost all the consumers speculate about future prices of commodities and at the first stage, whenever prices increase, most of the consumers believe and speculate that the prices will increase more in the future. The current study underhand is conducted to find the factors of speculative demand for wheat and its relationship with consumer’s welfare. The need for this study was to find the factors of speculative demand and its and its relationship with the welfare loss. For this purpose data were collected from one hundred wheat consumers who buy wheat monthly from rural and urban areas of District Mandi Baha ud Din, Pakistan at random by direct interviewing to analyze which factors compel them not to buy wheat at annual bases and how it is related to their income, family size, and monthly income. Results show a negative relationship between the speculative demand for wheat and income. There is also a positive relationship between speculation and family as well as between speculation and actual quantity demanded. The lower-income consumers do speculation about the prices of the wheat from September to March and cause prices to increase about 8.92% more than the normal prices which cost them to lose consumer welfare and surplus. It is concluded that if consumers avoid speculation, they can buy wheat at 8.92% lesser price and can enjoy more consumer welfare and surplus. An increase in speculative demand increases prices more than a normal increase. The addition of some portion of price increment merely is due to consumer’s psychological phenomenon of speculation.

INTERVENTION AND SIGNALING: INTERACTION BETWEEN CENTRAL BANKS AND FX MARKETS IN AN EMERGING MARKET

The paper analyzes the effectiveness of intervention and of signals on future intervention on the foreign exchange market of an emerging market (EM) facing large capital flows. A model of strategic interaction between speculators and the Central Bank shows the speculative demand curve to be downward sloping under greater uncertainty about fundamentals, which is common in EMs. Tests with Indian data confirm a stable speculative demand curve. The domestic currency appreciates when net dealer demand is positive. Intervention influences exchange rate levels and volatility. Anticipated intervention decreases dealer turnover, so expectations are stabilizing and signals on future intervention effective.

Stock crash shows cracks in 'China model'

Significance Strenuous government efforts to support the market raise doubts about the foresight and control exercised by Beijing in actively encouraging an unsustainable equities boom in the first place. Impacts Beijing will do everything it can to maintain asset values while seeking market-oriented yet non-critical reforms at the margins. A-shares will experience limited trading and prices determined by government regulation. Beijing's 'unlimited' capacity to support overseas financial commitments will be placed in doubt. Speculative demand will fall for oil, iron ore, copper and precious metals as collateral or a store of value against a weakening renminbi.

China's free trade zones will strengthen capital flows

Subject China's 'free trade zones'. Significance China last month formally announced details of three new 'free trade zones' (FTZs) modelled on the Shanghai FTZ introduced in 2013. The new FTZs are central to the long-term plan for China's economy to pursue domestic reforms and manage balance of payments pressures. As China seeks to develop new domestic drivers of economic growth in advanced manufacturing, services and technology, the line trodden by financial policymakers between preserving centralised control of the financial system and increasing exposure to foreign financial actors is slowly but steadily tilting towards cross-border financial liberalisation. Impacts Offshore and onshore renminbi markets will see greater convergence. State-owned banks will face greater pressure to reduce borrowing costs. The Shenzhen-Hong Kong stock connect will see greater flows of mid-cap equities trading. Speculative demand in mainland property markets will ease.