Since the start of the year the China sell-off has sparked carnage across global financial markets. Equity indices in Japan and Europe have lost a 10th of their value so far this year with the US not far behind.
Equities
Britain’s leading companies have surrendered more than £113 BN in value in the first 10 trading sessions this year, as a lethal cocktail of oil price volatility, China’s controversial attempt to manipulate its own stock market fall using ‘circuit breakers’ (halting trading periodically during the day) and fears of a prolonged global slowdown have culminated in a frightful fortnight for stock markets; the worst yearly start for 30 years.
The UK FTSE is at its lowest level in three years at 5,804. The blue-chip index dominated by international commodity and energy giants e.g. BP, Shell, Glencore has now lost 18.3 per cent since hitting a high of 7,104 in April.
The Chinese stock market has tumbled into official bear market territory, defined as any fall greater than 20pc from a recent high. Events in China have contaminated global financial markets. In Europe, the Stoxx 600 also entered a bear market, down 20.34pc since hitting a high in April. Wall Street has been far from immune from this global sell-off with US stocks falling below the lows they hit in August, when devaluation of China’s currency caused global market chaos.
Oil
For the third time this week the price of a barrel of Brent crude dipped below the USD 30 mark triggered by the Chinese stock market sell-off and slowing Chinese economy. China is seen as the driver of world growth and is indeed its economy has the highest global demand for oil after the US.
Traders have also taken fright at the prospect of Iranian oil flooding an already over-supplied market. Fears that the Islamic Republic could add to an existing supply glut as early as next week sent Brent crude down to USD 29 per barrel, matching lows seen in 2004.
Oil has shed more than 75pc since last summer- a post war record – as oversupply and fears about global economic growth have depressed the market.
Interest Rates
After December’s 0.25% rise in the US Federal Funds rate, the first rise since the 2008 financial crisis, the Federal Reserve had indicated four further interest rate rises were likely this year, although market expectations were for only two rate rises. After the rout in global equities and commodities so far this month, expectations in the bond market for further rate rises are waning. Figures showing US retail sales fell in December, even as tumbling prices for fuel boosted consumer spending power, also adds to the now softer view on further US rate rises.
Foreign Exchange
The US Dollar continues to strengthen as investors exit Emerging Market currencies; Emerging Market countries are big exporters of commodities with the prices of the latter at multi-year lows. Global growth prospects are weaker, financial volatility is higher and there is the pressure of a China currency devaluation, which is problematic for the Emerging Market currency basket. Last week’s China FX turmoil, when the offshore renminbi reached a five-year low against the dollar, sparked fears of a global currency war leading to the prospect of Emerging Market competitive devaluations this year.
Bond Markets
With the global risk appetite plummeting amid the stock and oil collapse, compounded by US growth concerns, investors have been seeking high quality (government) bonds as well as gold: Both assets are regarded as ‘safe haven’ asset classes in times of financial turmoil. Many short-dated (up to 5 years maturity) European government bonds only offer negative yields on this basis with investors more concerned about capital preservation than capital gain.
Equities
S&P 500: 1875
Nasdaq: 4500
FTSE 100: 5804
Bonds – 10 Year Government Yields
US 2.03%
EU 0.48%
GB 1.67%
Foreign Exchange
EUR/USD 1.0950 (1 euro buys 1.0950 dollars)
GBP/USD 1.4300 (1 pound buys 1.4300 dollars)
Commodities
OIL: Brent: 29.50 (dollars per barrel)
GOLD: 1090 (dollars per ounce)
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Paul McCormick
