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Financial markets stagger into the new year

16 February 2016

Financial markets stagger into the new year

Markets plunge in January but late-month rebound cuts damage

Far from being refreshed by the holidays, financial markets staggered into the new year, pummelled by a continuation of the diabolical news that had characterised the end of 2015 – worries over Chinese economic growth, resultant weaker global economic growth, a stronger US dollar after the Federal Reserve’s December interest rate rise, and its effects on commodity prices, particularly oil.

Markets plunging from the bell

Markets were very quickly in troubled territory. The Dow Jones Industrial got off to its worst-ever performance over the first 10 trading days of the year: that is a data set that dates back to 1897. Less than a fortnight into 2016, a swathe of world markets were officially in ‘correction’ territory – that is, down at least 10 per cent – led by the US trio of the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite Indices.

Also showing a double-digit loss at the worst were the FTSE-100 (UK), CAC 40 (France), DAX (Germany), SMI (Switzerland), TSX60 (Canada), S&P/ASX All Ordinaries (Australia), Nikkei 225 (Japan), Hang Seng (Hong Kong) and Mumbai Sensex (India).

When a market fall reaches 20 per cent, it has left correction behind and is officially a bear market. The Chinese market – both the Shanghai Composite Index and its Shenzhen counterpart – took just two weeks to reach this unwanted benchmark in 2016.

What happened?

Simply put, the markets were assailed by extreme fear about the plunging stock prices in China and the meltdown in oil prices. At one point in January, light crude oil reached US$26 a barrel, a 12-year low, and down a scarcely creditable 28 per cent in 2016. Ordinarily, a lower oil price is considered a fillip for global economic activity – oil being a major energy input – but the slump in crude is seen this time around as tying in with weak economic activity and shrinking world trade. But oil managed to recover from its low on January 20, which also marked a bottom for most stock markets.

An extraordinary strategy note issued in early January by the Royal Bank of Scotland, saying it was time to “sell everything”, did not help the heightened pessimism. RBS warned in the note of a “cataclysmic year” ahead for markets and advised clients to “sell everything except high quality bonds”.

Certainly Chinese investors appeared to be in a mood to listen, with the stock market twice within the first week triggering a circuit-breaker meant to limit falls, which saw trading shut down. Beijing has since suspended the mechanism amid fears that it only worsened investor nervousness about the health of the market. For the month, the Shanghai Composite Index plunged more than 24 per cent, while its Shenzhen counterpart dropped 27 per cent.

Late-month rebound cuts the damage

In the later part of January, most markets managed a recovery of sorts, helped firstly by comments by European Central Bank chief Mario Draghi that implied that further stimulus measures could come out of the central bank’s March meeting, and at month’s end, the Bank of Japan unexpectedly taking its benchmark interest rate negative, to boost the Japanese economy.

In particular, the Japanese move surprised the markets – coming a little more than a week after Bank of Japan governor Haruhiko Kuroda told the Japanese parliament he was “not seriously considering” a move to negative interest rates as part of any new plan to bolster the flatlining economy. By taking this action Japan joined Switzerland, Sweden and Denmark in the negative-interest-rate club.

In the US the S&P 500 ended the month down 5 per cent, while the Dow Jones lost 5.5 per cent and the Nasdaq Composite shed almost 8 per cent, its worst month since May 2010 (when the infamous “flash crash”, triggered by failures in computer-driven trading systems, whipped 10 per cent from the value of the market in just a few minutes, spooking investors.) The US market still posted its worst January performance since 2009.

In Europe the FTSE-100 index mounted the strongest rebound, cutting its January loss to 2.5 per cent by month’s end. The CAC 40 pruned its fall to 4.7 per cent, while the DAX ended the month down 8.8 per cent. Given these figures, the Stoxx Europe 600 Index was under heavy pressure, surrendering 6.4 per cent for the month.

IMF cuts global growth forecasts

Among January’s flow of economic data, China’s Gross Domestic Product (GDP) grew 6.8 per cent in the final quarter of 2015, down slightly from 6.9 per cent reported for the previous quarter, the slowest pace of growth since 2009. Within these figures, strength in services and consumption offset weaker manufacturing and exports. Beijing has set an economic growth target of 6.5 per cent for this year.

In the US, the Commerce Department said that GDP growth had slowed to an annual rate of 0.7 per cent in the December quarter, with the manufacturing sector already considered to be in recession. In Europe, leading indicators such as the private-sector Purchasing Managers Indices, beat expectations in January, pointing towards expansion in economic activity, but this is expected to be slight.

Mid-month, the International Monetary Fund (IMF) added to the gloom surrounding the health of the global economy by cutting its growth forecasts for the next two years. The IMF said growth in 2016 would come in at 3.4 per cent, rising to 3.6 per cent in 2017 – but these numbers were both 0.2 percentage points lower than forecasts made just three months ago. Not surprisingly, commodities generally had a poor month, led by crude oil, down 12.1 per cent, but gold managed to reburnish its safe-haven status, gaining 5.3 per cent in January.

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