World Week Ahead: Global outlook doubts

Monday 18th January 2016

The second week of 2016 fared not much better than the first for global equities and downside risks remain high as oil’s continuing rout hammered Wall Street on Friday, mirroring losses in China and then Europe.

Concern about China’s economy is ratcheting higher as this week begins, and investors will scrutinise a slew of data from the Asian powerhouse in the days ahead.

On Saturday China’s Premier Li Keqiang said the country’s gross domestic product exceeded US$10 trillion in 2015 and the economy grew by around 7 percent, with the services sector accounting for half of GDP.

Consumption contributed nearly 60 percent of growth, Li said, at the opening ceremony for the Asian Infrastructure Investment Bank in Beijing, Reuters reported.

His comments came as China prepares to release its fourth-quarter GPD data, as well as reports on industrial production, retail sales, and fixed asset investment on Tuesday. The data are critical to sentiment.

A renewed downturn on Chinese equity markets on Friday further spooked global investors, who are concerned the country’s efforts to stabilise its currency and stock markets are failing to gain traction—and the wider impact.

“It comes down to one basic fear, which is the global economy,” Russ Koesterich, global chief investment strategist for BlackRock, told Bloomberg. “What people are afraid of is this isn’t investors overreacting, but reflects a fundamental deterioration in growth.”

On Friday, the Dow Jones Industrial Average shed 2.4 percent, while the Standard & Poor’s 500 Index fell 2.2 percent, and the Nasdaq Composite Index slid 2.7 percent.

For the week, the Dow lost 2.2 percent, as did the S&P 500, while the Nasdaq dropped 3.3 percent.

Investors fled to US Treasuries, pushing yields on the benchmark 10-year note eight basis points lower to 2.04 percent. The drop in yield indicates increasing bets that the US Federal Reserve might delay its next interest rate rise.

"Both the huge decline in equities and oil are psychological catalysts and force investors to reassess their outlook," Gary Pollack, head of fixed-income trading at Deutsche Bank’s Private Wealth Management unit in New York, told Bloomberg. "As a result they embrace bonds. These types of moves have to give the Fed pause before they move again."

US markets are closed for the Martin Luther King Jr holiday today.

Today, OPEC is set to release its monthly oil report. On Friday both West Texas Intermediate crude and Brent closed nearly 6 percent weaker to finish at US$29.42 a barrel and US$29.05 a barrel in anticipation of Iranian crude flooding onto the global market. On the weekend, Iran was credited with curbing its nuclear weapons programme, setting the stage for sanctions, including against oil sales, to be lifted.

Some said oil prices might rise in the coming days.

"I think we will see a hard bounce in crude oil—two, three, four dollars back up into the mid 30s," Phillip Streible, senior market strategist at RJO Futures in Chicago, told Reuters.

Investors will also eye more US corporate results in the coming days. On Friday, shares of Citigroup, Wells Fargo, as well as those of Intel all slid after they reported their latest quarterly earnings.

Companies scheduled to report results this week include Morgan Stanley, Bank of America, Goldman Sachs, Netflix, IBM, Delta Airlines, and Starbucks.

Disappointing US data last week including on retail sales and factory output prompted some economists to downgrade their expectations for growth in the final quarter of 2015, as well as the first quarter of this year.

Fresh reports this week include the housing market index, due Tuesday; consumer price index, and housing starts, due Wednesday; weekly jobless claims, and Philadelphia Fed business outlook survey, due Thursday; Chicago Fed national activity index, PMI manufacturing index, existing home sales, and leading indicators due Friday.

In Europe, the Stoxx 600 Index finished Friday’s session with a drop of 2.8 percent to close at the lowest level in a year.

While “not yet big enough to signal true capitulation,” clients are “no longer in denial about recession or bear-market risks,” Bank of America said in a report that noted Europe’s first equity outflows in 15 weeks, Bloomberg reported.

BusinessDesk.co.nz

Comments from our readers

No comments yet