Will collapse in oil cause stock market crash?
Thom Hartmann was talking about this a few weeks ago, primarily energy junk bonds. Here's highlights from one article:
http://oil-price.net/en/articles/will-collapse-in-oil-price-cause-stock-market-crash.php
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Possible Scenario
The mechanism by which a fall in the price of oil could trigger a collapse in the stock market lies in the financial devices used to fund oil exploration and exploitation throughout the world, and particularly in the United States. Modern oil exploration is financed through a range of methods including issuance of shares to increase capital, and raising debt through bonds and bank loans.
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Today with oil under $50, many producers lose $20 for every barrel produced and will likely default on these loans, as outlined in last month's Falling Oil Price Slows US Fracking article. This loss will be passed to the banks that made the loans, as it happened with the housing sector in 2008.
A telltale sign of this is the recent 20% fall of high yield corporate bonds since this summer which follow very closely the fall in crude oil prices. Many investors are afraid of defaults in the high-yield market due to over-lending to the energy sector and are indiscriminately selling off "junk bonds." The downside of this corporate bond selloff across the board is that less favorable financing options will be available for other sectors, which in turn will spread the slowdown to the rest of the economy.
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Not all shale oil exploitation was financed by loans and bonds. Derivatives have played a part, too and many of the main players in the fracking business have their prices set in futures contracts all the way into 2016. The holders of these obligations to buy will be in serious trouble if the oil price does not turn around by mid-2015 when many of these contracts fall due. The major Wall Street banks hold a total of $3.9 trillion worth of commodities contract, the bulk of which are based on oil and were written when oil seemed to be destined to remain above $80 per barrel. If the price of oil stays below $80, America's biggest financial institutions will have to beg – once again – the Fed (and the taxpayer) for help.
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= new reply since forum marked as read
...but what would be the effect when combined with this:
ZURICH—Switzerland’s central bank triggered turmoil in the markets Thursday when it unexpectedly scrapped its cap on the Swiss franc’s exchange rate against the euro, a move that unleashed new volatility among bonds and currencies around the world and further underscored growing concerns about global economic prospects.
Against the cloudy backdrop of collapsing oil prices, a sharply rising dollar, fresh doubts about the stability of the euro and mounting global concerns over deflationary pressures, the move by the Swiss authorities was the starkest sign yet of the pressure policy makers face in dealing with unusual financial conditions that threaten the world’s already fragile economy.
http://www.wsj.com/articles/switzerland-scraps-currency-cap-1421320531
