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China Will Be a Major Wild Card for Global Markets in 2016

China Will Be a Major Wild Card for Global Markets in 2016

Monday, 04 January 2016 07:35 AM Current | Bio | Archive

On the first trading day of any year, it is interesting to look back for a moment at how stock markets and currencies performed last year.

The Dow Jones Industrials (-2.23 percent y/y = worst since 2008) and the S&P 500 (-0.73 percent y/y) delivered close to flat performances, and were certainly less interesting compared to markets in China, Japan, the U.K., Germany, France, and Italy when we look at them priced in their local currencies.

When we convert these currencies to U.S. dollars at FX spot prices, the overall picture becomes significantly bleaker. with Japan the only exception.

That said, earlier today the Asian markets fell. I think  China will be one of the very important wild cards that will define how global markets will perform over the year. Quantitative easing programs (QE) of the various central banks have very little chance of being extended any further with, maybe, the ECB the only big exception.

Coming back to China and after last week the “official” manufacturing Purchasing Managers' Index (PMI) coming in at 49.7, which kept it for the fifth consecutive month in contraction territory, today’s privately generated Caixin China General Manufacturing PMI showed business conditions continued in contraction territory for the tenth consecutive month as it printed a reading of 48.2 with:

  • new work continuing to fall,
  • new export work declining for first time in three months and
  • companies continuing to shed staff

Unsurprisingly, the Shanghai Shenzhen CSI 300 Index (SHSZ300) plunged today about 7 percent, or 263 points to 3,469, and was interestingly “saved” by the just installed circuit breakers that had their historical very first day “in operation.” These circuit breakers halt trading for 15 minutes when the CSI 300 is down by 5 percent and close the market for the day when the CSI 300 is down 7 percent.

No doubt the bad Caixin China General Manufacturing PMI number helped Chinese markets tumble.

Meanwhile, Xu Hongcai, the director of the Economic Research Department at the Center for International Economic Exchanges, said the PBoC’s monetary policy hasn't proved that effective, following repeated interest rate and RRR cuts by the PBoC.

When we take that together with the fact the Chinese Central Bank (PBoC) decided not to cut its benchmark interest rates or banks’ reserve requirement ratio (RRR), which is the amount of money banks are required to hold as reserves, even though investors had forecast such moves would come before or at the latest with the New Year, it’s understandable stock holders dumped their assets.

On top of that, last Thursday, “Qiushi” (which is an influential journal under the Communist Party of China) recalled President Xi Jinping saying in a speech in October: “The current economic downturn appears on the surface to have been caused by weak demand, but it was actually caused by a shortage of "effective supply."

That statement confirms the Chinese government’s position at present that has put emphasis on supply-side reforms such as reducing overcapacity, and by doing so expectations for large-scale monetary easing should be lowered substantially, which of course markets don’t like.

For now at least, it remains an open question how long the selling in China could last. But China has set world markets on the wrong foot at the start of 2016.

If I add to that and according to the Stock Trader's Almanac, the direction of January’s trading predicts the course for the year 75 percent of the time, and thinking back to what I wrote here about a month ago “The Next Recession Will Originate in China,” it looks like 2016 will probably not be one of these years where complacency will be the right attitude for investors.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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On the first trading day of the year, most of the time it has been interesting to look back for a moment how stock markets and currencies performed last year.
global, stock markets, investors, fed
Monday, 04 January 2016 07:35 AM
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