The global economic outlook has been worrisome since the markets opened for trading this year and it doesn’t look as if there would be an improvement any time soon. The global economic outlook has been particularly bleak as energy prices continue to fall. More so, the weakness in the Asian markets as spearheaded by Chinese economic woes doesn’t provide investors with bright hopes for the future.

U.S. markets are mixed this morning but the situation looks very dreary in Asia and Europe as the major market indices are in the red. On Monday, U.S. equities faced strong headwinds on the weakened global outlook; for instance, the S&P 500 was down 2.09%, Dow Jones was down 2.13%, and NASDAQ Composite was down 2.52%.  This piece seeks to explore how the weakness in global equities is likely to continue because of weakness in Asian markets and because of the prolonged drop in crude oil prices.

Asian markets cast doom and gloom on the global economic outlook

When China sneezes, the rest of Asia catches cold and this is evident in the weakness being experienced across board in Asia. This morning, China’s Shanghai was down 0.63%, Japan’s Nikkei 225 was down a massive 5.40%, and Hong Kong’s Hang Seng was slightly up with 0.23% gains. Growing concerns about Chinese economic woes have forcing global investors to have a rethink about putting their money in Asia.

China has been facing the hydra-headed problems of excessive debt, overcapacity, slow economic growth and possibly the largest real estate bubble in the world. The problems in Asia also took a turn for the worse on the heels of problems in Japan as Japanese bonds dropped below zero for the first time. The adoption of negative interest rates by the Bank of Japan contrasts sharply with the U.S. Federal Reserve’s decision to raise interest rates.

Moro so, the negative rates in Japan suggests that monetary policy in the Asia has reached its peak. The turmoil being faced by Asian stocks is having a ripple effect in the Forex markets as the Japanese Yen climbed to a 15-month peak.  Global investors might want to see how currency headwinds might affect their investments going forward and 10trade is a good starting point for forex beginners.

Lorne Baring, managing director of B Capital Wealth Management provides insight into how weakness in equities paints for gloomy picture for stocks.  In his words, “there is a high probability of a further correction in equity prices, led by banking and energy stocks. There could be a wave of defaults in the energy sector and that will damage the balance sheet of the banking sector”. He opines that slowing global growth doesn’t make the outlook particularly bright. He says, “We are advising our investors to drastically reduce risk and build protection.”

Oil could crash another 20% this year

The sustained weakness in oil prices have been one of the major issues casting dark shadows over the global economic outlook. However, it does appear that the global economic scene won’t see a change from the current supply and demand dynamics on oil prices.  This morning, the International Energy Agency (iea) released its Oil Market Report for February and the report doesn’t seem to provide much reason to be optimistic.

To start with, IEA expects crude oil supply to beat the demand by 2 million barrels per day in Q1 2016 and that the demand will continue to exceed supply by 1.5 million barrels per day in Q2 2016. It is a common knowledge in basic economics that a market dynamic in which the supply is higher than the demand will always lead to lower prices for the commodity. More so, the IEA expects the global demand for oil to slow down to 1.2 million barrels per day on the heels of a drop in a demand from U.S., Europe, and China.

Another problem that would weaken the global energy outlook further is the geopolitical tensions between OPEC and non-OPEC countries on the one hand and between Saudi Arabia, Iraq, and Iran on the other hand. The possibilities of an agreement to cut crude oil supply by OPEC and non-OPEC producers remain slim as the fight for market share continues in a bid to raise more revenue from crude oil. In fact, OPEC has increased its production by 280,000 barrels per day in January to 32.63 million barrels per day. If oil-producing countries agree to halt production, the outlook for oil will improve; however, the tensions between OPEC and non-OPEC nations make such an agreement practically impossible.