Wall Street analysts forecasting shades
Global stock markets experienced one of the worst first trading weeks of the year ever, pummeled by China’s ham-fisted attempts at stock market and currency reform. The S&P500 ended the first five days of 2016 down by 6%, while the DJIA erased 6.2% over the same period. Both the DJIA and the Nasdaq are now in correction, 10 percent off their 2015 highs.
The selloff got underway on Monday after Chinese regulators implemented new circuit breaker rules for mainland equity markets, including a halt in trading for the day if the index fell 7%. That morning, the official China December manufacturing PMI dropped slightly to 49.7, marking its fifth month in contraction, while the unofficial Caixin manufacturing PMI dropped to 48.2, for its tenth month in contraction. The data gave traders the excuse they needed to test the new rules, and the Shanghai Composite was halted after dropping by 7% in afternoon trading. Shanghai appeared to stabilize somewhat on Tuesday and Wednesday, then on Thursday it only took 29 minutes after the open of cash equity trading for the Shanghai index to tank 7% and trigger the circuit breaker. The yuan fixing was blamed for Thursday’s slide.
Traders dumped emerging market currencies while factoring the ramifications of a weaker yuan. The Mexican Peso and South Africa Rand hit fresh lifetime lows against the dollar. The Turkish Lira hit a three-month low and the Brazilian Real gained.
Relations between Saudi Arabia and Iran reached an all-time low after the Saudis executed 47 militants, including Nimr al-Nimr, a Shiite cleric and activist on behalf of the Shiite minority. Protests erupted in Iran and throughout the Shiite world. In Tehran, a mob burned down the Saudi embassy, leading Riyadh (and many of its Gulf allies) to cut diplomatic ties with Iran. With crude at more than a decade low, the Saudi budget deficit hit an unprecedented 15% of GDP, forcing the government to dip heavily into its reserves. In response, the Saudis said they might attempt to IPO the state oil company, Saudi Aramco. Analysts suggest that even if the Saudis sell a small stake, the listing could easily surpass that of Alibaba, whose $25 billion IPO is the largest on record. Aramco could be worth anything from $1 trillion to upwards of $10 trillion, which would make it the most valuable company in the world by a long shot.
WTI and Brent marched in lockstep from around $38 to test towards $32 on Thursday afternoon. There was a brief move higher on Monday due to the Saudi/Iran dustup, however the Gulf tension was no match for global market turmoil.
The US December jobs report was surprisingly strong, capping off a good year of employment growth. Non-farm payrolls far exceeded expectations, rising by 292K versus 200K.