Weekly Market Update
Notable events over the last week
- 2016 started off on an inauspicious note which saw $2.3tn wiped off global stocks. China was the main culprit as it fixed the onshore CNY sharply lower, already implying an annual depreciation far beyond market expectations. The Shanghai Composite was down 9.97% by the end of the week and the S&P 500 was down roughly 6% despite a strong jobs report; the index has lost more than $1tn so far this year. It also sent commodity prices falling with Brent oil now at approx. $32 a barrel, the lowest since 2004.
- In China, the Renminbi devaluation spooked markets as Chinese authorities lowered the USD fix every day last week, bar Friday, when the rate was actually set higher. Investors had anticipated a gradual 5-7% devaluation of the Yuan in 2016 but the first few fixings are indicating a much greater cut. In addition, the Shanghai Composite circuit breaker which was implemented at the beginning of the year in order to reduce volatility may have exacerbated market concerns. Despite the circuit breaker being designed to lower volatility, it took less than 15 minutes on both Monday and Thursday for the CSI 300 to reach the -7% threshold after the -5% suspension, as investors rushed to sell to raise cash. The circuit breaker has since been abolished.
- In the US, December nonfarm payrolls grew by 292,000 up from a revised 252,000 in November (211,000 first estimated) and smashing expectations of 200,000 while the unemployment rate held steady at 5.0%, in line with expectations. The solid payroll growth was accompanied by upward revisions to previous months, which added an extra 50,000 jobs to the total tally.
- U.S. manufacturing activity slowed further in December, as the impact of a stronger U.S. dollar undermined export profitability and low oil prices continued to drag on the economy. The ISM’s monthly manufacturing index slipped to 48.2 against a consensus of 49, marking the second month in a row that it had fallen below 50 and the weakest reading since June 2009.
- Last week also saw the release of the December Federal Reserve meeting minutes which saw the committee raise US rates for the first time in seven years. The minutes failed to provide much guidance for the future path of rate hikes, only noting that future rate hikes would be gradual and dependent on economic data. The minutes not only emphasised that FOMC members are worried about below target inflation, but they are also watching for tightening financial conditions, a strengthening dollar and the worsening global outlook. The Fed’s next meeting is Jan. 26-27. Futures markets place a 90.5% probability on the Fed staying on hold at the meeting.
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