Crude oil fell sharply again as the International Energy Agency (IEA) cut its forecast for global oil demand for the 5th time. The lack of demand has been attributed to weakening global conditions and increasing supplies, especially coming from the US shale revolution.
Crude oil is now at its lowest level since 2009, hurting anything tied to oil production. This can be reflected in the stock market of countries that export energy. The biggest foreign losers are Russia, Canada, and several oil-rich South American economies such as Brazil and Venezuela.
Weakness in foreign developed markets can be seen in the chart above. The EAFE index (tracking 21 developed countries but excluding the US and Canada) is at its lowest level in 15 months. Most of the losses come from countries in central and eastern Europe with economies tied to Russia.
On the other hand, falling commodity prices are making emerging markets fall even more sharply. EEM ishares (tracking stocks in developing countries) fell by 17% in the past three months. The two biggest losers are oil producers Russia and Brazil, whose stocks markets fell by 48% and 35% since July.
Meanwhile, the US economy is in better shape than foreign economies, but it’s not immune to weakness in foreign countries. US stocks started to weaken in December and they will probably remain under pressure until the situation in foreign economies starts to stabilize. This will strongly depend on what crude oil does from here.