Investors are still confused about the stunning collapse in stock markets. It’s being blamed on the collapse in oil and other commodities, China, the “threat” of rising interest rates, the strong dollar, the risk of recession in America.

Does that make sense – are those negatives as bad as they’re made out to be? Are we being given the whole truth? And where can we expect share markets to go from here?

Let’s examine the facts…

The immediate impact of the collapse in commodity prices is harsh. Oil companies are imposing savage cuts on staffs and on businesses supplying them, idling two-thirds of drilling rigs in the US, for example. They have scrapped $400 billion worth of expansion plans. Two-thirds of the loans to US oil and gas firms are trading at distressed levels (threatened by default).

Every nation dependent on oil exports is swimming in a sea of red ink. Azerbaijan, a small Central Asian producer, has begged for $4 billion in aid from the International Monetary Fund. Even Nigeria, one of the world’s big producers, has asked for billions of international emergency aid. Sovereign wealth funds are selling off their shareholdings of blue chips and their other prized assets such as London properties in a cash-raising panic.

Global producers of commodities, including some of the world’s major emerging economies and biggest companies, are in crisis. And the pain is going to get worse as they run through their financial reserves.

However, stock markets are forgetting about the slow-to-come-through but enormous favourable impacts of dirt-cheap commodities, especially oil.

David Fuller's view

Here is Martin Spring's On Target.

I think Martin Spring’s lengthy section on stock markets in this issue is broadly correct.  I also think this bear market’s rapid reduction in valuations will create a terrific buying opportunity later this year. 

Currently, most stock markets are also technically oversold.  However, where indices or shares have only recently completed top formations, or in a few instances are still forming tops, near-term upside scope is likely to be limited by overhead supply.  Where stock markets and indices are in freefall, banks for instance, they have already seen the majority of their declines.  Nevertheless, near-term upside scope for these sectors is likely to be limited to sharp bouts of short covering, followed by a medium-term support building process before sustainable recoveries can occur.