Equity markets across the world started the year on the back foot, shaken by renewed investor concern over the strength of China’s economy and less-than-clear measures by its monetary authorities.
China is slated to release the latest data on both consumer and producer prices over the weekend
Ben Steinebach Head of Investment Strategy
Things started going awry as soon as last weekend, as the Chinese released disappointing sentiment numbers for purchasing managers in manufacturing, while the ongoing slump in commodity prices, including oil, remained a significant detractor. The Chinese authorities responded with measures that had the effect of undermining investor confidence and attempted to weaken the country’s currency, but without providing any clarity on this score. In August 2015, a similar yuan devaluation had sparked major turbulence in the markets; in their first 2016 week of trading, the US and European equity markets lost 5%, the worst opening week for the United States since 1928, at the beginning of the Great Depression. Germany saw its equities sink even deeper –¬ over 7%, reflecting the close trading ties between the Chinese and German economies. In China itself, the Shanghai and Shenzhen stock markets lost a whopping 10%, although they recovered some ground this morning (Friday 8th).
Chinese economy in much better shape than generally believed
Economic growth in China started to slow down early last year, with this percolating through to the rest of the world by way of falling Chinese imports. To an extent, we’re looking at a regular slowdown, but the Chinese economy is not so transparent to the outside world as the country’s statistics are less complete than in more developed countries – and it took a while for investors to cotton on.
In fact, we believe that the economy was showing green shoots of a revival towards the end of 2015. Plus which, China is transitioning from an economy focusing on industrial output, investment and export into one based on consumer spending and services, and less rapid growth is part of this shift. Towards the end of last year, we noted a tentative improvement in (exporting) business confidence at China’s key trading partners, such as Korea and Taiwan, while the uptick in industrial orders in Germany also points to improving Chinese import growth among other factors. This would seem to suggest that some of the turbulence in the Chinese markets and other stock exchanges across the world is not entirely justified. In fact, it’s the lack of clarity about a multitude of measures that is mostly to blame, and better communications would be very desirable indeed.
Fairly healthy US and European economies
US manufacturing is feeling the pinch of the dollar’s strength but the broader economy is fairly healthy, as is Europe’s, so we remain sanguine about the equity markets. US manufacturing’s weaker position showed up in purchasing manager sentiment, with the index coming down to 48.2 in December from 48.6 in November, whereas it had been predicted to edge up to 49 (50 implies neither growth nor contraction). The same index for services also inched down, but its healthy 55.3 reading still suggests a very rosy outlook indeed. This figures – services are much less sensitive to exchange rate movements than manufacturing. Conversely, the weak euro put a bright shine on releases in the eurozone, with broader sentiment gauging business and consumer confidence continuing to rise, from 106.1 in November to 106.8 in December. German industrial output may have unexpectedly fallen in November when compared with October, but the upturn in industrial orders suggests a robust trend. Retail sales also reveal a buoyant picture and consumers are increasingly contributing to economic growth.
Corporate news in the Netherlands was few and far between in the past week and had little impact on equity prices. Satnav player TomTom reported an improvement in its position in the market for (semi) automatic cars, in addition to an acquisition in Poland. By contrast, Sligro’s fourth quarter disappointed, particularly its health care operations. The AEX, which closed 2015 on 441.82 (annualised gain: 4.1%), lost 4.8% to 420.76 in the first week of 2016. The slight upturn on the Asian markets helped it to add nearly 0.3% this morning (422 points).
Spotlight on US labour report this afternoon
We’re hitting a news-light stretch next week, most particularly in terms of corporate news but macroeconomic releases should also be pretty thin on the ground. In corporate Holland, TenCate shareholders will no doubt be looking forward to the Thursday closing date for a public bid, which should reveal whether or not the Gilde-cum-Parcom consortium have acquired enough shares to proceed. In the macroeconomic arena, the same day should bring the latest on the Bank of England and European Central Bank meetings. We do not expect any major policy upheavals.
China is slated to release the latest data on both consumer and producer prices over the weekend, followed by trade balance and December export and import figures later in the week. The UK Office for National Statistics is set to release the production index for November, as well as the broader economic measure of gross domestic product (GDP). Industrial production data are likewise expected for the European Union as a whole, for Italy and for the United States. December consumer prices figures will be released in France and Italy, as will producer prices in the United States, the latter also scheduled to publish its first indicator of consumer confidence for January (University of Michigan) and retail sales for December. First up, though, is the American labour report covering employment and unemployment in December – scheduled to come out at 2.30 this afternoon and undoubtedly already known to you by the time you read this.