Market Update - Opening City Doors to London Financial Market Employment

China & Oil Continue To Drive Markets

China’s GDP growth last year was 6.9%, very healthy by Western standards, but the slowest rate of growth by Chinese standards for 25 years. China is in the process of shifting from a manufacturing / export led economy to one focused on domestic consumption and services. This adjustment will take time. Many observers think China’s current growth rate is at least 2 or 3 per cent below last year’s official figure.What’s the problem with a Chinese economic slowdown? As part of China’s historic robust growth, the country has been the main buyer of global commodities (needed in the manufacturing process); everything from copper to rubber to aluminium and nickel. The ‘end buyer’ has just stopped buying!

Commodity prices have plummeted with Emerging Market countries particularly affected as such countries are the main producers of commodities as the latter are a fundamental component of their economic models e.g. oil accounts for 95% of all Venezuela’s export revenue. As Emerging Market economic fundamentals have deteriorated, so their currencies have collapsed e.g. The Russian Rouble has gone from 1 USD =30 Roubles 18 months ago to 1 USD =75 Roubles today. Western equity markets have fallen sharply; down 20% at one stage from last year’s highs and down 10% in the first few weeks of January.

Reasons:

China is seen as a driver of world growth
It is harder for Western companies to sell goods into a slowing Chinese economy
It is harder for Western companies to compete with China ‘dumping’ cheap goods in European markets

Note: The UK FTSE 100 index is heavily weighted towards international energy and commodity focused companies who have their headquarters in the UK e.g. Shell, BP, Glencore, Rio Tinto Zinc and is therefore still 20% down from last year’s April high. It could be argued the FTSE 100 is does not appropriately represent the UK economy.Last week China posted the weakest manufacturing data for 3 years maintaining the theme of slowing economic and therefore global growth.

Oil

Oil has fallen from USD 115 per barrel 18 months ago to USD 30 today. Although global economic growth is far from robust (so oil demand is limited) the oil price problem is one of supply.Saudi Arabia heads OPEC and the country producers 40% of the world’s oil. In order to force higher cost US oil producers out of the market, it has increased supply accordingly. This policy may or may not work. The US has itself increased production and indeed exported oil for the first time in many years this year. Russia’s oil supply is healthy and Iran is also about to increase production and export oil after its embargo has been lifted. Other OPEC producers oil production costs are well above USD 30 per barrel and such countries are very unhappy with the current situation.Oil rallied sharply over the last week (USD 28 to USD 35 pb) as there was hope over OPEC and Russia agreeing to come together to jointly cut production to address this over-supply issue.

Equity Markets Correlation

An extraordinary feature of financial markets over the last several months has been the close correlation of oil and equity market price performance i.e. oil rises 2%, major equity markets rise 2%.On one level this can be explained in fundamental economic terms. The oil price fall reflects a likely slowing world economy (therefore companies earnings and therefore their share price should fall).However, the correlation would seem to be as much to do with investor sentiment and speculation as anything else! Still the recovery in the oil price means that many major equity markets have recovered to be now only down 6 / 7% for 2016 so far. The UK FTSE is down more as international commodity companies are heavily represented in the index as discussed.

Interest Rates & Bonds

US: The FOMC (Federal Open Market Committee) raised rates by a ¼ per cent in December and forecast 4 more ¼ per cent rate rises this year. With global equity markets tumbling in January, and investor and economic sentiment weak, the market believes only one such interest rate rise is now likely in 2016.
UK: Base Rates are 0.5%.A 2016 increase looks like it is postponed to 2017 for the same reasons.
EUR: More Quantitative Easing is likely with an interest rate rise a distant prospect.As a consequence of this low interest rate environment global bond yields remain very low by historical standards exemplified by European Government bond yields in negative territory for all bonds out to 5 year maturities i.e. a negative rate of return. Why would an investor buy such a product? Mainly for capital preservation in a volatile and risky world, rather than capital appreciation reasons.

Foreign Exchange

US Dollar: The outlook looks favourable for a continued strong dollar as it is likely the US will be the only country to raise interest rates this year.
UK Pound: Weakening versus the US Dollar is likely as UK rates are unlikely to rise anytime soon.
Euro: Likely to remain weak with no rate rise in prospect.
Chinese Renminbi: This is crucial topic as the Chinese authorities have let their currency weaken over the last 9 months to allow Chinese exports to be more competitively priced abroad to compensate for the current economic slowdown at home e.g. it allows for the dumping of cheap Chinese steel in Europe so presenting a problem for European steel producers. So currency ‘competitive devaluation’ becomes a problem for the world at large.

Other

Gold continues to slowly strengthen. Gold does well as a ‘safe haven’ investment in a volatile world. At the end of the day, gold has been around as an investment for 5000 years! Furthermore, with interest rates so low, the ‘opportunity cost’ from holding gold is reduced.

Equities

S&P 500: 1930

Nasdaq: 4600

FTSE 100: 6050

Bonds – 10 Year Government Yields

US 1.95%

EU 0.35%

GB 1.62%

Foreign Exchange

EUR/USD 1.0900 (1 euro buys 1.0900 dollars)

GBP/USD 1.4300 (1 pound buys 1.4300 dollars)

Commodities

OIL: Brent: 33.00 (dollars per barrel)

GOLD: 1125 (dollars per ounce)

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Paul McCormick

Paul McCormick is the founder of Opening City Doors and is a Financial Market Specialist having worked for several leading Investment Banks and financial technology institutions additionally.He therefore provides a unique insight, and unusually broad perspective, into the opportunities available in London Financial Markets and related sectors and how to launch your career in the ‘City’.

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