Weekly Market Update: January 11th 2016

Market Recap

Global equity markets sold off sharply last week, a repeat of what we saw in August of last year, with many of the major equity indices experiencing the worst weekly declines since 2011. Plunging oil prices and the decline in many other commodities is not helping sentiment in markets, but most of the fear is emanating from China, the disorderly devaluation of the Yuan and the turmoil in mainland shares.

Many equity indices suffered worst weekly declines since 2011…..

In Europe, the FTSE Eurofirst 300 closed down –6.74% for the week; the German DAX index was one of the worst performers, falling -8.32%. In the US, the S&P 500 index fell -5.96% while the tech-heavy NASDAQ Composite fell -7.26%.  Japan’s Nikkei 225 index fell -7.02%.

All sorts of fear inducing statistics were being quoted as equity markets moved deeper into the red over the week. The S&P suffered its worst start to a year since 1929. Spare a thought for the 400 wealthiest individuals, who according to Bloomberg lost $194 billion over the week. They are only worth a combined $3.8 trillion, compared with $4.03 trillion a year ago.

China’s Shanghai Composite Index of mainland shares fell -9.96%. I continue to see investing in mainland Chinese equities as the equivalent of riding a moped in that part of the world, extremely dangerous! We have always been aware that China is a big risk but events last week are adding to concern among market participants that authorities there are not in control of the situation, and that the authorities – who were responsible for the market turnaround in the final quarter of 2016 – will be helpless in avoiding a hard landing.

The tipping point for the global equity market sell-off in August was the Yuan devaluation. It is the same story again, to the surprise of market participants according to the headlines, “world markets were stunned”. The market is always surprised but this has been building for some time. I’ll point you to my blog from last March, http://macromarkets.ie/beggar-neighbour-policies/, with the quarterly report from Hoisington Asset Management worth another read in order to better understand current market developments.

The geopolitical backdrop continues to deteriorate, with tensions building in the Korean peninsula. The North Koreans claim to have tested a hydrogen bomb. The South Koreans have responded with full force, blaring pop music across the border from loud speakers that can carry the sound 6 miles into North Korea. .

Demand for perceived ‘safe-haven’ assets…..

Amidst the sell-off in global equity markets, demand for perceived ‘safe-haven’ assets pushed the prices of core government bonds higher. With yields moving inversely to prices, the German 10-year bond yield declined 10bps to 0.51%. The US 10-year treasury yield fell 14bps to 2.13% while the UK 10-year government bond yield moved down 19bps to 1.77%. Gold moved back into favour as volatility has picked up, the price per troy ounce rising 3.84% last week to $1,103.

Week Ahead

European equity markets have opened lower this morning following a sell-off in Asia overnight; China’s Shanghai Composite Index of mainland shares fell a further -5.03%. The global market sell-off in the third quarter of 2015 was arrested by the reassuring words/actions from the all-important central banks. Can they do the same again?

Is this another 2008 crisis? The risks have been building for years. Whether 2016 will be the year they play out is difficult to say. Timing the exact inflection point in markets is a difficult one, so the best advice for members planning for retirement, and I know I have repeated myself many times, is to align oneself to the most appropriate fund given one’s willingness and ability to take risk, time to retirement and overall retirement goal.

For those who wish to time the equity market, it is a bit like when you are going to an event and you look for a parking spot as close to the door as possible. You see a parking spot, a few hundred metres from the door, but you want to get closer, and so you the risk of ending up much further back. Would you give up the certainty of that parking spot, or roll the dice in the hope of doing better, but in the knowledge you could do worse? Those rushing for the exits in markets are taking the certain option, locking in accumulated gains, after 6-7 years of rising markets.