Groundhog Day

Investors across Europe woke with eager anticipation to the year ahead on the first day of trading in 2016, hoping to put the events of last year behind them. Turning on their computers, they would have immediately felt like Bill Murray in Groundhog Day, as 2015 fears were reignited, China and an increased tension in the Middle East. Overnight on Sunday China announced December’s manufacturing data, the index reading of 48.2 was below expectations, triggering an immediate trading halt in Chinese equities after a fall of 5%. Chinese authorities did step in to try and calm the market. China is trying to shift its economy from a manufacturing based one to a consumer based one, there was some better news on that front. On Friday we get the December’s import export data, should this beat expectations, at least for the short term Chinese markets may well calm.  Chinese economic data had shown signs of stabalising in the past months, so this weaker than expected manufacturing report felt like a double blow.

The reality as far as China is concerned, Monday was a shock, however the Chinese government are committed to stimulate growth and the likelihood is they will do more to this effect should they need to do so, the US is in a more complicated position.

At the start of the year, we said we believe the US economy is what is going to make the year ahead for equity investors. Later on Monday December’s US manufacturing data was released, should this number had beaten expectations, we believe the China data would have soon been forgotten.  Rather similar to China, the US manufacturing survey came in below expectations, to our view this is slightly more concerning. Unlike most other central banks around the globe, the Federal Reserve want to continue to tighten monetary policy. To do this they need to see stronger not weaker than expected economic data. The Federal Reserve will not want to see this continue and, will hope that in the coming months leading indicators will pick up allowing them to continue to raise rates at a modest rate.

The other event overnight on Monday was the increase in political tensions in the Middle East. As much as there have been many fears that the continuation of a weak oil price will drag more emerging economies into recession and further impact global growth, markets will not want to see a supply led rise. Should the oil price start to rise on supply restraints rather than demand, this could lead to fears of stagflation. 

Posted on January 6, 2016 .