The first trading week of the year 2016 got off to a rocky start with China at the epicenter. On the 1st of January, Chinese manufacturing PMI data was released which posted a flat reading of 49.7, down from 49.6 previously. The decline came about marking the fifth month of decline on the manufacturing PMI as global demand for Chinese goods continued to fall. The data marked a continuation of downbeat economic reports from the world’s second largest economy which has seen a significant slowdown as the PBoC estimates that growth in 2015 is likely to stall to the slowest pace in a decade after growing at a pace of 7.30% in 2014. Expectations are that the Chinese GDP grew at 6.90% in 2015 and is expected to remain weak well into 2016 as well.
The grim outlook was enough to send the equity markets in a frenzy. Chinese Shanghai Stock exchange opened the week with 7.0% losses, triggering a newly installed circuit breaker which halts trading when the markets fall 7.0% or more.
[Tweet “PBoC estimates that growth in 2015 is likely to stall to the slowest pace in a decade after growing at a pace of 7.30% in 2014”]
The sharp selloff rubbed into the other Asian markets and eventually to the US Dow Jones and the S&P500. The Dow Index shed 372 points or lost about -2.21% on the first trading day of the year while the S&P500 lost 39.8 points or about -1.93%. The markets got a breather on Tuesday as Chinese markets showed signs of stabilizing, but by Wednesday, another 7% plunge in Chinese equities was enough to send the global markets on a falling spree.
On a weekly basis, the US S&P500 lost 140 points, closing -6.80% lower while the Dow Jones Index shed over 1000 points to close -7.0% lower for the week. Towards the end of the week, Chinese authorities finally did away with the circuit breakers.
China Consumer Prices: On Saturday, Chinese inflation numbers released showed muted growth in inflation, falling well below the official inflation target range of 3.0%. Consumer prices in China grew 1.60% in December on an annualized basis, following a modest gain of 1.50% in November 2015. However, producer prices index continued to remain weak at -5.90%, extending a record 46 months of decline, which is likely to keep inflation subdued in China.
The risk aversion spread to the currency markets as well, as the Japanese Yen, a preferred safe haven bid gained over 2.0% in the currency markets. The US Dollar remained on the back foot and was trading mixed. A strong December jobs report also didn’t help soothe investor sentiment and the markets continued to bet on the Yen on expectations that China could weaken the Yuan or make policy changes over the weekend.
The threat of further Yuan devaluation has gripped the markets, as a weakening Yuan makes Chinese exports more competitive while at the same time exporting deflation to its trading partners, namely the US. With US inflation not really up to the mark, the Yuan volatility could potentially upset the Fed’s plans on rate hikes as well if inflation continues to remain flat on top of the added threat from the Yuan. Looking ahead, Chinese led volatility is likely to keep the markets on the edge with the risk aversion likely to remain in place for the near term.
