Insights

Recovery trims February losses

15 March 2016

January’s market malaise continued into February, with most major world markets notching a fourth consecutive monthly slide, as concerns over weakening global growth turned into actual fear of recession. But a mid-February rally gave sharemarkets some respite from the falls, lifting global stocks by more than 5 per cent in the second half of the month, although they still ended the month lower.

Oil surges, central banks prime the pump

Earlier in February, January’s dire economic mood seemed to set the tone. But toward the middle of the month, share markets desperate for good news seized upon better news from the commodities markets. First, the United Arab Emirates energy minister said that OPEC members might be ready to cooperate to curb crude oil output, which was followed by Saudi Arabia and Russia agreeing to freeze oil output at near-record levels. The latter development represents the first coordinated move by the world’s two largest producers to counter a slump that has hammered economies, markets and companies.

Suddenly oil prices rose 10 per cent. Later, China, the world's biggest steel producer, announced that it would close between 100 million and 150 million tonnes of annual crude steel capacity by 2020, as much as 13 per cent of existing capacity, sparking a rebound in iron ore prices.

China’s central bank governor Zhou Xiaochuan said the People’s Bank of China (PBOC) had “multiple” policy instruments it could use to avert any “risks,” and the nation’s China’s Premier Li Keqiang said on Monday that Beijing would take decisive actions if needed. European Central Bank president Mario Draghi chimed in with a comment that the ECB was “ready to do its part” to spur growth, further boosting speculation that policy makers would step up stimulus measures.

Risk-on trade returns with a vengeance

Add in better Chinese lending data for January (data showed Chinese banks issued a record amount of loans), and more reassuring US retail sales (+0.6 per cent in January) and consumer spending numbers, and market sentiment turned 180 degrees. German banking giant Deutsche Bank surged 17 per cent on the back of reports it is looking to boost its balance sheet strength, and just like that, European bank stock prices took off.

Global shares regained more than 5 per cent in the second half of the month, as improving investor sentiment brought the ‘risk-on’ trade back with a vengeance. However, that still left most markets short of where they began the month.

The mini-revival in the second half of February could not have come at a better time for stocks, with many bourses in ‘bear market’ territory, defined as a 20 per cent decline. From 2015 highs to February lows, US stocks were down by 14 per cent, Australian shares by 20 per cent, Eurozone stocks by 27 per cent, Japanese shares by 28 per cent, emerging-markets stocks by 27 per cent and the Chinese index by 49 per cent.

Recovery trims February losses

In the US, the late-month recovery saw the Dow Jones Industrial Average eke out a gain of 0.3 per cent for the month (up 5.5 per cent from the February low), while the S&P 500 index (down 0.4 per cent for the month, but up 5.6 per cent from the month low) and Nasdaq Composite index (down 1.2 per cent, but up 6.8 per cent from the February low) both posted their third consecutive monthly fall. In the fourth-quarter earnings season in the US, about 69 per cent of S&P 500 companies reported earnings above the average estimate, while 47 per cent reported sales above the average estimate.

In Europe the Stoxx 600 index ended the month down 2.4 per cent, but up 10 per cent on its February low. The European index recoveries were substantial: Germany’s DAX index lost 3.1 per cent for the month, but rebounded 8.5 per cent from the month’s low; France’s CAC 40 index shed 1.4 per cent for February, but surged 11.7 per cent from the low-point; and the UK’s FTSE-100 index saw a 10.1 per cent jump from the February low, enough for it to squeeze out a gain of 0.2 per cent for the month.

In China, the Shanghai Composite index ended the month down 1.8 per cent, with its Shenzhen counterpart down 2.7 per cent; both indices saw their low point on the final day. In Tokyo the Nikkei index was down, at its February low-point, an alarming 14.6 per cent, but a 7.2 per cent rebound from that point cut its loss for the month to 8.5 per cent – still a significant haircut. In Hong Kong the Hang Seng index lost 2.9 per cent in February after a 4.3 per cent recovery from its February low. Australia’s

S&P/ASX 200 shed 2.5 per cent for the month, after lifting 2.4 per cent off its monthly low.

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