Weekly Market Update: January 18th 2016

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Market Recap

Sentiment in global equity markets last week resembled the atmosphere in Anfield yesterday after the final whistle. Like most equity investors, transfixed by the continuous stream of red as market participants rushed for the exits, Liverpool fans were left with the same feeling of ‘where do we go from here’ after defeat to bitter rivals Manchester United. They say there is always someone in the market making money, and the small group of United fans celebrating in the Anfield Road stand, are more representative of the minority of short sellers who are revelling in the latest market declines. While the major central bankers of the world will no doubt come to rescue for global equity investors, Liverpool FC will need more than a printing press to regain their former glory.

Selling continues unabated in equity markets…..

In Europe, the FTSE Eurofirst 300 closed down -3.24% for the week. The German DAX index fell -3.09%, ending the week at 9,545.27. The index has now fallen -16.32% since November 30th of 2015, and remains -23.09% below the peak of 12,374 reach in April, as concerns over the outlook for China and the global economy continue to weigh on investor confidence.

In the US, the latest economic data raised doubts over the strength of the US recovery, with market participants tempering expectations on the pace of rate hikes from the US Federal Reserve this year. The S&P 500 index ended the week down -2.17%, while the tech-heavy NASDAQ Composite fell -3.34%.

In Asia, Chinese equity investors suffered another stomach churning week. The Shanghai Composite index of mainland shares fell another -8.96%.  The index has fallen -20.36% since December 21st, below the low in August, and down -41.79% from the bubble high of June 2015.

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 0.47%. The US 10-year treasury yield fell 14bps to 2.03% while the UK 10-year government bond yield moved down 11bps to 1.66%.

Slide in oil prices continues, Iranian oil to add to supply….

The slide in oil prices is showing no let up, with the price of WTI crude oil falling a further -11.30% last week, to $29.45 per barrel. The price is now down a stunning -72.57% since June 2014. Adding to the bad news for oil prices is the removal of sanctions on Iran, and the announcement of their intention to increase oil exports by 500,000 barrels a day.

There appears to be no real catalyst in sight for prices to move higher, other than a short squeeze on speculators. Net shorts, traders betting on price declines, are now at an all-time high. Some event, for example a surprise announcement by OPEC to cut back oil production, could force traders to reverse these positions, referred to as short covering, creating an avalanche of buying at once that pushes prices higher.

Week Ahead

US markets are closed today for the Martin Luther King holiday. European equity indices are marginally lower after a weak session in Asia overnight.

There is a raft of data released from China tomorrow including fourth quarter GDP growth, retail sales and industrial production. The flash PMI surveys from Europe, the US and China will provide some insight into what we can expect in the first quarter from these economies. There is inflation date for December from Europe, the UK and the US.

On the monetary policy front, the European Central Bank (ECB) and the Bank of Canada (BOC) will hold monetary policy meetings this week. The ECB’s meeting on Thursday will be keenly watched. This time last year ECB President Mario Draghi announced the expansion of their bond purchase program, which served to drive the major European equity indices sharply higher. The sugar high has worn off and these indices are now back below the levels recorded a year ago. Super Mario to the rescue again for equity investors? Likely.

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