Saturday 26 May 2018

Daily Market Update: Global equity markets start the New Year with a bang

Mongkok shopping district in Hong Kong, China. REUTERS/Bobby Yip
Mongkok shopping district in Hong Kong, China. REUTERS/Bobby Yip

Richard Ramsey

Global equity markets have started the New Year with a bang.

The Chinese stock market set the tone with a 7% decline in its first session of 2016. Trading was initially suspended for 15 minutes when circuit breakers kicked-in following a 5% fall. However, when trading re-opened it only took a few minutes for the sell-off to extend to 7%. Trading was then halted for the day with the 7% decline representing the worst ever start to the year for Chinese stocks.

You may recall that last year stock market volatility led to the Chinese authorities implementing a share-sale ban for large companies. This has been lifted today and partly explains the sell-off. It is also worth putting the scale of this decline in perspective. Last summer Chinese equities posted declines of 5% or more on 20 occasions and falls of at least 7% on 10 occasions. Investor sentiment was also dented by weaker than expected manufacturing data. The Chinese Caixin manufacturing PMI slipped to a 3-month low of 48.2 in December. This represented the tenth consecutive month of manufacturing contraction (i.e. below the 50.0 expansion / contraction threshold).

Asian equities have taken their lead from China with Japan’s Nikkei 225 Index posting a 3% decline this morning. The equity sell-off has extended to European exchanges in early trading with the Euro Stoxx index of the Eurozone’s 50 leading blue-chip companies down 3% as I write. Risk aversion within financial markets, particularly within the Middle-East, has come to the fore. Saudi Arabia and Iran are in the midst of one of their worst diplomatic standoffs in twenty five years. The former has severed diplomatic ties with the latter after the Saudi Arabian embassy in Tehran was torched by protesters over the weekend. The unrest followed Saudi Arabia’s execution of 47 people, including a top Shiite cleric, on terrorism related charges.

This has incensed the Shiite majority in the Eastern Province of Saudi Arabia and Iran which has a Shiite majority. The unexpected escalation in geopolitical tension between Iran and Saudi Arabia and the wider Middle-East comes at a time when Saudi Arabia is implementing austerity for the first time in its history. Austerity within the Middle-East’s largest economy and a ramping up of geopolitical tensions are a dangerous mix. This also has the potential to push up the oil price. Brent crude breached $38pb overnight before easing back towards $37pb this morning. This compares with just over $36pb a fortnight ago.

The health of the global manufacturing sector remains in focus today with the various PMI surveys. The Eurozone’s manufacturing PMI for December, released within the last hour, has been confirmed at 53.2 – a 20-month high and marginally above the preliminary flash estimate. The UK manufacturing PMI is the key release in the UK this morning. The consensus amongst analysts is for 52.8 print which is broadly in line with November’s reading.

This afternoon’s US ISM manufacturing survey could through up a surprise following some weaker than expected regional manufacturing surveys over the last week. The Dallas Fed manufacturing index for fell to its lowest level last month since May. Meanwhile the Chicago PMI slumped from 48.7 in November to 42.9 (50.0 was expected). The US economy has never not been in recession when the Chicago PMI has been posting such a sharp rate of contraction.

Following the festive period trading volumes within the financial markets will return to their normal levels this week. Looking at the currency markets it is noted that EUR/USD is little changed at $1.091 relative to a fortnight ago ($1.087). The movements with sterling have been more marked with the pound giving up ground against both the single currency and the dollar over the last 2 weeks. Cable has fallen from $1.492 to $1.477 over the last fortnight. Meanwhile EUR/GBP has moved from 72.9p to 73.9p over the same period having briefly breached 74p this morning.

Looking to the week ahead it is a busy week for top tier economic data releases culminating with Friday’s nonfarm payrolls report. In the UK we have the construction and services PMIs on Tuesday and Wednesday respectively. In the Eurozone we have the CPI estimate for December due tomorrow with the final services & composite PMIs on Wednesday. The various confidence surveys for the Eurozone are due on Thursday.

In the US we have the ADP private sector employment report on Wednesday alongside the ISM nonmanufacturing survey, durable goods orders and Fed Minutes. Friday’s nonfarm payrolls report is expected to reveal a 200k net gain in employment in December. This is broadly in line with November’s outturn of 197k. Meanwhile Chinese economic data releases due this week include the services PMI on Wednesday and exports on Friday. Outside of these financial markets will pay close attention to equity markets and developments linked to Saudi Arabia.

Wishing you all a happy, healthy and prosperous New Year.

Sponsored by: Ulster Bank

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