TradeTheNews.com Weekly
Market Update: China Fears Spoil the New Year
Fri, 08 Jan 2016 16:05 PM EST
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. Weak Chinese data and the PBoC's
attempts to shore up the economy by accelerating the devaluation of the yuan shuttered
Chinese equity trading twice, creating panicked reactions in various global
equity markets. Gold and government bond prices held up relatively well with
investors turning away from risk assets, but oil prices continued to sink.
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.
For eight straight sessions through Thursday, the PBoC weakened its yuan
reference rate, dropping it to 6.5646 on Thursday, the weakest rate against the
dollar since March 2011. Thursday's fix was significantly weaker, -0.5% from
the prior day, the biggest margin of decline since the August devaluation. The
move prompted concerns that the central bank's continued efforts to weaken the
yuan will spur massive investment outflows from the mainland. The PBoC set the
rate a bit higher on Friday. There were unconfirmed reports that the PBoC
heavily intervened in markets throughout the week in an attempt to control the
declines in the yuan. China's defense of the yuan had managed to stabilize the
currency for almost four months following the notorious August devaluation,
although the effort led to the first-ever annual decline in the nation's FX
reserves, seen in data out on Thursday.
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 a foothold above four to the USD while its close ties to the
Chinese economy were scrutinized. With oil trading in the low $30's and copper
testing 2.00/lb., other commodity-backed economies saw their currencies fare
very poorly as well. USD/CAD broke out above the 1.40 mark reaching levels not
seen in more than a decade. The Aussie Dollar fell roughly 3 big figures
against the Greenback to trade below 0.70 for the first time since early
October.
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. Traders ignored big drawdowns in the DoE and API crude inventory
reports, as well. After fears about China and emerging market growth, the
strong dollar appeared to be the other major catalyst holding down oil prices.
The greenback at its weakest remained above the low levels seen in November and
early December, however EUR/USD lunged back below 1.0750 early in the week,
marking one-month lows.
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 200Ke. The blowout in the ADP report earlier in the week had hinted at a
good showing on Friday. Unemployment remains at 5%. Wages were the only sour
note in the report: average hourly earnings were flat in December compared to the
prior month and rose 2.5% against the prior year. Both numbers missed
expectations.
Automakers reported total industry sales of nearly 17.5 million for 2015, for
the industry's best sales year ever. Fiat and Ford reported December US sales
results that fell a bit short of expectations, while GM's December sales met
consensus estimates. Fiat and Ford also reported that total 2015 sales were the
best they'd seen in a decade. US-traded ADRs of Volkswagen sank sharply after
the US government filed a lawsuit seeking penalties as high as $80 billion -
more than the company is worth - and faulted the German carmaker for a lack of
progress fixing cars with rigged engines.
Shares of Apple were under pressure this week after press reports warned that
the company was expected to reduce the output of its iPhone 6s and 6s Plus
devices by about 30% between January and March. Apple was said to be cutting
back production in order to allow iPhone dealers to work their way through
inventories that have piled up at retailers in markets ranging from China and
Japan to Europe and the US amid lackluster sales. Several prominent firms cut
price targets and ratings on Apple in the wake of the reports. Then on
Thursday, Apple component suppliers Cirrus Logic and Qorvo cut their forecasts
for the current quarter.
In other tech news, the Consumer Electronics Show in Las Vegas took place this
week, with the usual assortment of flashy tech baubles on display. Smartwatches
got the main billing, with investors frowning on the new FitBit Blaze watch.
Amazon also got a great deal of attention for entering the semiconductor
business and selling its own branded chips to other companies.
In merger news, the big story was Shire getting very close to success in its
long-running pursuit of Baxalta. Back in August, Shire had proposed an
all-stock deal at around $45/share for Baxalta, valuing it around $30 billion.
Baxalta chose not to even enter negotiations back then, but this time around an
offer as high as $48/share with a cash component up to 40% of the deal appears
to have gotten their attention. ON Semiconductor got a new competitor in its
pursuit of Fairchild Semiconductor. China Resources Microelectronics Limited
offered $21.70/share, above ON Semi's $20/share bid, and Fairchild's board determined
it to be a superior offer.
