Any optimism that 2016 would be a better year for stock markets than 2015 took a hefty knock on Monday, and while we did see a bit of a recovery in European markets yesterday it still remains clear that investors will face a considerable amount of uncertainty across global markets against a backdrop of potential further tightening from the US Federal Reserve, concerns about slowing global growth, and the possibility of a major flare-up in the Middle East between Saudi Arabia and Iran, prompting a blow-off in oil prices.
This heady cocktail of concerns was added to overnight in Asia on reports that North Korea has tested a nuclear weapon further heightening anxiety in a region notorious for friction at a time of heightened economic fragility, and this looks set to see European markets open lower this morning.
This week’s attempts by Chinese authorities to stabilise their own markets did appear to have steadied stocks for the time being but continued weakness in commodity prices as well as a firming US dollar look set to point to further stock market declines in the near term, as deflationary concerns keep investors cautious. In the last two months the Yuan has slipped nearly 5% against the US dollar, and could well weaken further.
Weak manufacturing data from China has been cited as the main reason for the poor start to this year but this isn’t exactly new given that this sector has been weak for some time. The Chinese services sector returned a fairly positive number at the end of last week, the best number since September 2014, though that reading last week stands in stark contrast to this morning’s weak 50.2 Caixin reading, which suggests that for all the concerns about China, there is some evidence that we might be seeing some rebalancing. Unfortunately due to the lack of transparency with respect to Chinese economic data it’s not immediately clear whether this is actually happening.
In the US it’s a similar story on the manufacturing side with a Chicago PMI number of 42.9 last week with its worst reading since June 2009. With this week’s ISM manufacturing also slipping further into contraction in December to 48.2, the question investors should be asking is why the Federal Reserve is looking to raise rates further at a time when the US services sector ISM is also showing signs of weakening in in recent months, returning a slightly weaker reading in every month since we hit the July peaks of 60.3. While auto sales have been extremely positive, posting a record in 2015, this has been as a result of an explosion of cheap credit, hardly a sustainable indicator of economic strength.
Today’s December number is expected to be more or less unchanged from November at 55.9, but given how weak some of the more recent data has been, notably durable goods this may prove somewhat optimistic.
While last month’s decision by the Federal Reserve to raise rates was pretty much expected, questions are now being asked about the wisdom of further action at a time when manufacturing in the world’s two biggest economies is on its knees. Today’s FOMC minutes are likely to give us a flavour of any compromises that may have been made in order to get the doves on board with respect to last month’s decision to hike rates.
Previous comments from Lael Brainard and Daniel Tarullo, both permanent Fed governors suggested that they were uneasy about any decisions to tighten policy prematurely. Recent data is unlikely to have assuaged those concerns and while this year’s FOMC voting members are likely to have a more hawkish bias, this doesn’t automatically presuppose that we’ll get the three rate hikes markets seem they might get this year.
Today’s ADP employment report is expected to show 198k jobs added in December, down slightly from November’s 217k.
While yesterday’s weaker than expected EU inflation data saw the DAX recover some ground, the overall European economy continues to feel some of the benefit of lower oil prices with the services sector in particular feeling the benefits with the latest December readings for Spain, Italy, France and Germany. These are all expected to be fairly positive with the exception of France which is still feeling the after effects of the terrorist events in November.
In the UK, yesterday’s rebound in construction PMI, has helped take some out of the sting of the weaker than expected manufacturing number on Monday. Today’s services PMI reading will need to be similarly positive to allay concerns about a weak end to 2015 and a positive 0.5% Q4 GDP reading later this month. Expectations are for a slightly weaker reading from 55.9 to 55.6.
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