The decline in crude oil prices is putting the squeeze to many large oil producing nations such as Iran, Russia, and Venezuela. The Russian ruble and Russian equities are in free-fall and Venezuelan CDS (credit default swaps) are blowing out to levels not seen since the 2008 Global Financial Crisis:

Click to enlarge

RUB_USD

Venezuela 5-year CDS

Venezuela_5Y_CDS

The Russian stock market has essentially traded in line with the price of crude oil since June when crude began its descent; the RSX (Market Vectors Russia ETF) is currently at a 95% 20-day rolling correlation with crude oil:

RSX_WTI_CORR

The knock on effects of the crude oil decline are far reaching and growing more numerous by the day. What remains to be seen is how much the oil meltdown will affect other markets and asset classes. Thus far, US equity indices have remained unscathed even though the US energy sector has taken a tumble:

XLE_-_SPX

The oil meltdown is like a virus that is slowly spreading across markets and asset classes. While US large cap equities may be relatively well sheltered, they are certainly not immune to this virus. Investors may be  in for some disappointment when Q4 earnings reporting season rolls around in January:

  • Earnings expectations have never been higher

S&P_earnings_estimates

Source: Yardeni Research

  • S&P 500 companies generate nearly 1/2 (47%) of their revenue from overseas
  • Roughly 15% of the S&P 500 consists of energy & materials stocks