Investors who thought global markets turned the page on 2015's investment themes got a rude awakening on Monday as last summer’s concerns over China’s economy resurfaced.
As of
3:00 p.m. ET, the Dow Jones Industrial Average was 405 points lower, or
2.32% to 17021. The S&P 500 dropped 45 points, or 2.23% to 1998, while the
Nasdaq Composite tumbled 135 points, or 2.69% to 4873.
All
10 S&P 500 sectors were in negative territory, as technology and health
care led the way down, while energy was the best performer, bouncing between
gains and losses.
Today's Markets
Just
hours into the first session of 2016, China kicked off the New Year with a
trading halt as concerns flared again about economic growth in the
nation. Jitters spread to global equity markets, hitting U.S. stocks hard
and putting the Dow on pace for its worst first day of the year since 1932.
The
Shanghai Composite index, China's benchmark average, plunged 6.9%, hitting a
brand new circuit breaker safety measure – announced late last year and put
into action Monday-- halting trading twice during the session, first for 15
minutes and finally closing the session 90 minutes early.
The
catalyst for the selloff was twofold. First was a fresh round of weak factory
data out of China. The nation’s purchasing manager’s index tumbled again,
coming in at a reading of 49.7 for the month. That was slightly above
November’s reading, but below the line of 50 that separates expansion from
contraction. The latest figures bring the count to ten-consecutive months of
contraction in the manufacturing sector.
But
Jason Pride, director of investment strategy at Glenmede, said the bigger part
of the anxiety puzzle was nervousness about an impeding reprieve on a ban of
large-scale asset purchases by large stakeholders in China. The ban was imposed
after a sharp move lower in equity markets last summer, which ignited a global
selloff, as the world began to take note of China's slowing economic growth. Pride
said while many cite the PMI data as the primary reason for the selloff, other
changes are more significant.
“The
actual catalyst is weakened investor sentiment driven by regulatory changes including
the introduction of new circuit breakers and the end of the six-month ban on
large-scale sales. Those are more of a near-term phenomenon,” he explained.
“The circuit breakers mean equity investors have limited liquidity during
declines, and for anyone seeing equity portfolios are somewhat liquid, [limits]
can cause them to pare some positions back on the margin.”
The
Shanghai Composite ended down 6.9%, while Hong Kong’s Hang Seng dropped
2.7%, and Japan’s Nikkei plunged 3%.
The
sudden and dramatic declines also weighed on European averages. The Euro Stoxx
50, which tracks large-cap companies in the eurozone, dropped 3.21%, while
the German Dax tumbled 4.25%, the French CAC 40 gapped 2.71% lower, and the
UK’s FTSE 100 shed 2.30%.
Aaron
Jett, vice president of global equity research at Bel Air Investment Advisors,
said while the reaction was extreme, the narrative is a story the markets have
seen before – and you don’t’ have to look back very far to replay it.
“It
should be no secret now that China is trying to move from a manufacturing to a
consumer economy. That’s been in the news for a while. This is a huge
overreaction,” he said. “The consumer economy continues to improve in China. On
such a big base now, it just can’t grow at 10% forever.”
Jett
said selling at such a dramatic pace is likely to be only temporary as there
was no shortage of headlines for investors to digest.
After
a steep selloff at the opening bell, U.S. investors parsed data on their own
manufacturing sector, which came in weaker than expected and showed activity
remained firmly in contraction territory.
The
Institute for Supply Management reported its gauge of factory activity
unexpectedly fell in December to 48.2, the lowest reading since June 2009, from
48.6 in November. Economists expected a slight move higher to 49, still below
the reading of 50 that separates contraction from expansion. Jett
said whether manufacturing in the U.S. continues to weaken, or shows some signs
of life depends a fair amount on what happens with the U.S. dollar and the
Fed’s tightening cycle.
“Most
of the currency effect, which hurts manufacturing in the U.S., has been felt
already. It depends on how many times the Fed moves this year, though. If it
moves too fast, it could strengthen the dollar quickly, which would hurt our
markets, and would obviously make U.S. manufacturing less attractive globally,”
he explained.
Still,
he expects slow movement from the Fed given 2016 is an election year, and data
that hasn’t been, in his view, strong enough to support many more hikes from
the central bank in the near term.
Oil Changes its Tune…Temporarily
Global
oil markets saw a shift in sentiment on Monday as tension in the Middle East
helped boost prices. But the commodity couldn’t hold onto gains of more than 4%
as oversupply continued to plague the market.
On
Sunday, Saudi Arabia cut diplomatic ties with Iran, giving Iran’s ambassador 48
hours to leave the country, after protests in Tehran, the nation’s largest
city, resulted in a fire after the execution of a Saudi cleric. Just a day
later,
Reuters
reported that the Saudi foreign minister said the country will cut all
commercial ties, put a stop to air traffic between the two nations, and ban its
citizens from traveling to Iran.
“This
is definitely more of a supply story than a demand story,” Jett explained.
“Demand has been pretty decent and continued to grow, and it should continue at
a decent clip. But will it be enough to soak up enough supply in the U.S.
market? Probably not,” he said.
He
added that for prices to move higher on Middle East tension alone, the status
of the conflict would have to escalate substantially.
“It
would have to be something a lot more serious as far as military action
compared to cutting ties between Iran and Saudi Arabia,” he explained. “The oil
market is paying more attention to the supply side than the demand side.
Because the U.S. is not in the Middle East and producing more than ever, it’s
trumping the power of OPEC.”
In
recent action, West Texas Intermediate crude prices slipped 0.76% to $36.76 a
barrel, while Brent, the international benchmark, declined 0.16% to $37.22 a
barrel.
Pride
added that energy-related equities are beginning to pique his interest as
valuations are becoming more attractive for buyers across the board.
“They’ve
just been hit so hard that they’re getting closer to the point where valuation
becomes more attractive enough to ignore the near-term fundamentals. But we’re
not quite there yet,” he said.
Elsewhere
in commodities, gold prices gained 1.40% to $1,075 a troy ounce, while silver
paced 0.30% higher to $13.82 an ounce. Copper dropped 2.59% to $2.07 a pound on
the back of China’s disappointing economic data.http://www.foxbusiness.com/markets/2016/01/04/us-futures-plunge/
Comments
The Dow consists of the top global companies. The S&P consists of the top 500 US
corporations. They all do their
manufacturing overseas, mainly in China.
That’s why the China stock market matters to the Dow and S&P. So, your 401k is probably heavily invested in
the Dow and S&P.
Norb Leahy, Dunwoody GA Tea Party Leader
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