While you were sleeping: Stocks tumble, gold rises

Tuesday 5th January 2016

Equities sank on both sides of the Atlantic, while US Treasuries and gold strengthened amid concern about global economic growth.Disappointing factory activity data from China prompted a stock market selloff and a subsequent trading halt, while the nation’s central bank allowed the yuan to weaken again.

“China is a reminder that there aren’t many things to be bullish about going into this year,” Michael O’Rourke, chief market strategist at JonesTrading Institutional Services in Greenwich, Connecticut, told Bloomberg.

Indeed, China remains a key concern in 2016, according to the International Monetary Fund’s top economist, Maurice Obstfeld.

China’s “economy is slowing as it transitions from investment and manufacturing to consumption and services,” Obstfeld said in an interview posted on the IMF’s website. “But the global spillovers from China’s reduced rate of growth, through its diminished imports and lower demand for commodities, have been much larger than we would have anticipated.”

“Growth below the authorities’ official targets could again spook global financial markets—but then again, time-honoured methods of enforcing growth targets could simply extend economic imbalances, spelling possible trouble down the road,” Obstfeld noted.

Wall Street slid. In 12.34pm trading in New York, the Dow Jones Industrial Average dropped 2.4 percent, while the Nasdaq Composite Index sank 2.9 percent. In 12.20pm trading, the Standard & Poor’s 500 Index retreated 2.3 percent.

Declines in shares of Cisco and those of Microsoft, last 3.8 percent and 3.1 percent weaker respectively, led the drop in the Dow lower. All of the Dow’s shares traded weaker at midday.

Treasuries rose, pushing yields on the benchmark 10-year note six basis points lower to 2.21 percent in New York.

“The sharp drop in Chinese stocks and weaker PMI data is giving a hit to overall risk sentiment, so we are seeing some flight to safety and lower bond yields in response,” Allan von Mehren, chief analyst at Danske Bank in Copenhagen, told Bloomberg.

The latest data on US manufacturing aren’t rosy either, with a report showing it shrank in the final month of 2015. The Institute for Supply Management’s index dropped to 48.2 in December, the weakest since June 2009, down from 48.6 in November.

Separately, Markit's purchasing managers' index weakened to 51.2 from 52.8 in November, the lowest since October 2012.

“The manufacturing sector saw a disappointing end to 2015, and its plight looks set to continue into the New Year as headwinds show no sign of abating any time soon," Chris Williamson, chief economist at Markit, said in a statement.

“Order book growth has stalled as producers report some of the toughest trading conditions since the end of the global financial crisis,” Williamson noted.

In Europe, the Stoxx 600 Index finished the first trading day of 2016 with a 2.5 percent drop from the previous close. The UK’s FTSE 100 Index declined 2.4 percent, France’s CAC 40 Index shed 2.5 percent, while Germany’s DAX Index plunged 4.3 percent. Stocks pared some losses ahead of the close.

The concern about China outweighed a report showing euro-zone manufacturing rose at the fastest pace in 20 months in December, bettering expectations.

“The end of 2015 saw the eurozone manufacturing recovery gain further traction, with rates of expansion in production and new orders over the final quarter besting those of quarter three," Rob Dobson, senior economist at Markit, said in a statement. “Furthermore, with the Greek PMI rising back into growth territory in December, we are now seeing concurrent expansions signalled in all of the surveyed nations for the first time since April 2014."

Meanwhile, oil was lower amid continuing concern about the global glut, reversing a surge higher after Saudi Arabia severed diplomatic ties with Iran amid a growing spat between the two nations that has heightened tensions in the Middle East.

BusinessDesk.co.nz

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