UK & Europe
It hasn’t been a textbook start for 2016. It’s in fact been one of the worst first trading days on record. Markets have been swept up in a renewed fear that China’s economic slowdown is picking up speed after surprisingly weak manufacturing data caused a 7% decline in the CSI 300, which triggered circuit-breakers and a halt in daily trading across Chinese stock markets.
The FTSE 100 dropped over 2%, led lower by the China-sensitive basic resource sector but fared better than the DAX where Germany’s export exposure to China sent shares plummeting by over 4%.
Miners were top fallers on the FTSE 100 with Anglo American (L:AAL) down sharply tracking a steep fall in the price of industrial metals. The price of copper fell over 3%. A big worry is that the fall in manufacturing activity amongst the small and medium enterprises in China tracked in the Caixin survey could offset the expansion in government deficit spending announced in December.
The respite enjoyed by metal prices and mining companies at the tail-end of December could be short-lived if China’s economy is entering a new weaker phase. Whether Chinese shares drop again on Tuesday may rest with the reaction, if any from Chinese authorities. An interest-rate cut would probably be best-received by markets but the People’s Bank of China may not want to pander to every weak moment in the stock market. Looking further out, a policy response of further devaluation of the yuan to boost manufacturing exports may be outright unfriendly towards international markets.
China-exposed financial institutions Standard Chartered (L:STAN) and HSBC (L:HSBA) were also top fallers.
US
Stocks in the US were dumped in early trading as nervy investors sold off some of the best performing shares of 2015. Netflix (O:NFLX) was top faller on the S&P 500, falling as much as 7% after a broker downgrade while shares of Facebook (O:FB) fell over 4%, Amazon (O:AMZN) was down over 5% and Google-parent Alphabet was lower by 3.5%.
Outside of the major indices, Alibaba (N:BABA), the Chinese internet stock was down over 7%.
Sentiment was not helped by a surprise drop in US factory activity. The ISM manufacturing PMI decline to 48.2 when a rise to 49.1 from 48.6 was expected.
FX
The US Dollar was mostly stronger against major currencies but it was the Japanese yen that was top FX riser on the first full trading day of the New Year as markets flooded to safe-havens in the wake of a decline in Chinese stocks triggering daily circuit breakers. USD/JPY dropped below 119 to a fresh two-month low.
Australia’s sensitivity to China’s economy as a primary consumer of its commodity exports meant the Aussie dollar saw heavy losses. AUD/USD slumped 1.4% and over a 100 pips.
The British pound was relatively firm in spite of disappointing manufacturing data that suggested weaker activity than the Eurozone. GBP/USD found support around 1.47 while EUR/GBP fell below 0.74.
Commodities
Oil prices broke out on Monday, rising over 3% and taking Brent crude just short of $39 per barrel. More bad blood between Saudi Arabia and Iran adds to already tetchy Middle Eastern tensions amidst the unrest in Syria and Iraq. Thin liquidity at the start of the New Year probably over-egged the reaction in oil markets to the political spat which is unlikely to disrupt output.
Once sanctions are lifted, Iran is unlikely to let relations with Saudi Arabia dent plans for a big increase in exports. Iran may decide to take more of a hard-line stance against the Saudi-oriented policy of not cutting production at the next OPEC meeting. Although that’s in half a year so there’s time for things to calm down by then.
The flight to safety amongst the rout in global equities sent the price of gold shooting higher back over $1080 per oz. The rest of the metals space got clobbered with copper lower by as much as 2.5% thanks to its dependency on potentially waning Chinese demand for commodities.
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