Market analysis – Global Update by Junaid Wilscon
Investors focused on China and its falling equity market and currencies last week. Little attention was given to what is usually the major event of a month’s first week, namely the U.S. employment report. For a while Friday morning, investors did pay attention to the much better than anticipated report. However, that did not last and equities in Europe ended the week on a dour note while U.S. investors could not decide which way to go — To buy? To sell? All major equity indexes retreated for the week. It reminded many of last summer when the yuan fixing dropped and the Shanghai Composite plunged.
At week’s end, European markets were up solidly in early trading after the Chinese stock market bounced back from Thursday’s steep decline and early trading halt. The stronger than expected U.S. employment report for December also contributed to the positive mood among investors. However, those early gains quickly eroded and the European markets ended the session in the red. Crude oil prices, which had been up in early trade Friday, reversed as the session wore on and slipped back near 12-year lows. Investors also cashed in profits after a tumultuous week of trading.
On Thursday, more than £30 billion were wiped off British blue chips after China allowed its currency to weaken faster than before, rocking global markets and sending commodity shares to their lowest levels for about a decade. However, the index ended off of its lows after China suspended a circuit breaker on its stock market that traders said was causing — rather than preventing — volatility. According to some analysts, this week was similar to August and September of 2015. They said that most of the damage is not the fact that the Chinese economy is continuing to struggle to turn things around, but rather the uncertainty going forward in regards to how much the yuan will be devalued.
Equities tumbled last week, initially thanks to disappointing data from China that indicated the economy has continued to weaken. The yuan retreated in value against the U.S. dollar adding to investors’ sentiment. China’s problems were internally generated as officials attempted to prop up plunging share prices. Equity trading was forced to close down on two separate days when a new automatic circuit breaker designed to put a floor under equities shut markets down. All equity indexes declined on the week. The Shanghai Composite sank 10.0%, the Nikkei tumbled 7.0% and the Hang Seng lost 6.7 %.
A downbeat Chinese manufacturing report first sent stocks spiralling last Monday, prompting the country’s market to close early. It also set off a global rout with stocks in Europe and the United States getting hit. Since then, investors have remained been unnerved.
The U.S. dollar was mixed in the first week of January. The currency advanced against the pound and the commodity currencies — the Canadian and Australian dollars. However, the U.S. dollar retreated against the euro, Swiss franc and the yen.
China ended an eight day run of lower values to the yuan’s reference rate on Friday. The declines sent shockwaves through financial markets and escalated fears of a global currency war. The People’s Bank of China set the daily fixing, which restricts onshore moves to a maximum 2 percent on either side, 0.02 percent stronger than the previous day’s reference rate. The offshore yuan fell 0.03 percent to 6.6843 a dollar as of 4.03 p.m.
Data on Thursday showed China’s foreign exchange reserves fell by the most on record last month, down $108 billion in December alone and by $513 billion overall last year. That suggests an accelerating outflow of money from China which may largely be the result of the opening up of its financial markets over the past year, but also a sign that China may be in deepening trouble.
Equities got off to a poor start in 2016. However, there was a surprising number of positive economic surprises during the week which were largely ignored as investors obsessed about China.
The Bank of England will make its monetary policy announcement Thursday. No policy changes are expected. The Federal Reserve will publish its Beige Book in preparation for its FOMC meeting later this month. Industrial production for November will be released by the UK, Eurozone, Italy and India. Australia posts December employment and unemployment. Investors will likely keep an eye on the continuing festering political situation in the Middle East and the price of crude.
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