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Monday, January 4, 2016
US markets plunge after China markets collapse
Dow tumbled 378, decliners over advancers 4-1 & NAZ dropped 137, taking it below 4.9K. The MLP index fell 1+ to the 288s & the REIT index lost 3+, going below 321. Junk bond funds were lower & Treasuries rallied in this time of growing tensions around the globe. Oil jumped up 2% to the high 37s & gold traded higher.
Sell orders piled up fast Chinese brokerage firms as China’s
CSI 300 Index tumbled 5%, triggering a 15-minute
trading halt. Investors were scrambling to exit before getting
locked in by a full-day suspension set to take effect at 7%. When
the first halt was lifted, the market reaction was swift: it took just 7 mins for losses to reach the threshold for a 2nd suspension
as volumes surged to their highs of the day. Spiraling
losses on the first day of China’s circuit breakers show how measures
meant to help restore calm risk doing just the opposite. Unlike similar circuit breakers in markets
including the US, the threshold for trading halts in China is low
enough that they would have kicked in 20 times last summer alone.
Circuit
breakers are the latest effort by Chinese authorities to tame swings in
a stock market where the growing use of leverage by individual
investors drove an unprecedented boom, followed by a $5T bust, in the span of just a few months last year. The CSI 300 index of the
nation’s biggest companies rose or fell by 5% 20 times from the
start of Jun thru early Sep, with daily moves exceeding 7% on ½ of those occasions. Chinese shares began Mon
with losses after data showed manufacturing contracted for a 5th
straight month & investors anticipated the end of a ban on share sales
by major stakeholders at the end of this week. Turnover surged after the suspension ended, peaking in the
final minute before a 7% slump halted trading in shares, futures & options for the rest of the day. It was the worst-ever start to a year for the
Chinese equity market, with the benchmark Shanghai Composite Index
falling 6.9%.
Unlike
some measures to calm the $7.1T equity market over the summer,
Chinese authorities sought input from market participants when the
circuit-breaker proposal was unveiled in Sep. They even made some
changes to the rules, including shortening the length of the first halt
to 15 mins from 30 mins, before implementing them for the first
time. Traders said the halts took effect as anticipated
without any major technical problems.
German inflation unexpectedly slowed, in a sign that price growth in
the 19-nation euro area may also be weaker than anticipated. Consumer
prices in Europe’s largest economy rose an annual 0.2% in
Dec after increasing 0.3% in Nov, the Federal
Statistics Office said. Economists predicted a
pickup to 0.4%. Before this report, economists forecast
euro-area inflation accelerated to 0.4% last month from 0.2% in Nov. The
data could spark calls for the ECB to increase
stimulus just a month after pres Mario Draghi's latest effort to
rekindle inflation & nurture a fragile economic recovery were met with
disappointment in financial markets. A renewed drop in oil prices is
damping expectations that inflation rates would rise in coming months,
endangering the ECB forecast of an average rate of 1% in the
euro area this year. In Dec, the ECB predicted euro-area
inflation would accelerate to 1.6% in 2017 from 0.1% last
year. The Bundesbank foresees inflation in Germany at 2% next
year. The statistics office said today inflation averaged 0.1% in 2015.
Saudi Arabia & some of its Gulf allies severed or downgraded ties
with Iran in the biggest meltdown in relations between the Mid-East powers in almost 3 decades, raising the specter of deepening
conflicts across the volatile region. The Saudi gov &
Bahrain gave Iranian ambassadors 48 hours to leave after protesters set
the Saudi embassy in Tehran on fire over the weekend following the
execution of Saudi cleric Nimr a-Nimr, a critic of the kingdom's treatment of its Shiite minority. The UAE reduced its diplomatic representation to the level of charge
d'affaires. The clash exposes again the fault lines in the
tinderbox region & risks worsening conflicts in Yemen & Syria, where
Sunni-dominated Saudi Arabia and Shiite Iran are fighting proxy
wars. The widening of the rift follows Saudi criticism of the US-led
deal last year over Iran's nuclear program. The
oil price rose while stock markets in China, Japan & across Europe
tumbled on the first full trading day of 2016. While concern was mainly
about the Chinese economy, the prospect of more strains in the Middle
East initially contributed to the turmoil. Iranian
Supreme Leader Ayatollah Ali Khamenei had said earlier that Saudi
rulers would face repercussions for the execution of the Shiite cleric & that “the divine hand of revenge will take the Saudi politicians by
the throat.” Iranian-backed Lebanese group Hezbollah accused the Saudi
royal family for killing al-Nimr. The standoff between Iran &
Saudi Arabia is the biggest between the regional powers since the late
1980s, when the kingdom suspended ties with Iran after its embassy was
attacked following the death of Iranian pilgrims during Hajj in Mecca.
Saudi Arabia also supported Saddam Hussein's Iraq against Iran during
the first Gulf War. The latest clash probably will undermine
already-stumbling efforts to end the war in Syria, where Saudi Arabia
backs largely Sunni militants & Iran supports the regime of President
Bashar al-Assad.
The stock market is beginning the new year in an unusually ugly way. Chaos in China caused the rout in markets there & other markets around the globe followed suit. Meanwhile, tensions in the Mid-East have risen. Peace in that region is a far off goal. Those tensions have a major impact on oil prices which has seen unprecedented selling in the last 2 years. Stock market behavior on the first day of a new year, is a simple measure used to forecast a new year. Today's crash sends a very ominous tone for 2016.
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