Bad news on China, oil, and earnings and the triggering of resting sell stops combined to push markets down and investors around the world found few reasons to be bullish on Friday.
By Vikram Rangala
Friday, January 15, 2016
Global stock, commodity, and currency markets not only undid Thursday’s gains but dropped to new multi-month lows. By mid-day US Eastern time, the Dow Jones Industrial Average was down over 375 points, the Nasdaq down over 130, and the S&P 500 45 points below Thursday’s close.
European stocks fared worse, falling to their lowest in over a year. The Stoxx 600 fell in London to a weekly drop of 3.1 percent. The worst performer among major stock indexes was the Shanghai Composite Index, which officially entered a bear market for the second time in 7 months, down 21 percent from its December high.
Chinese stocks had gotten a boost from an unprecedented effort by the government to support both stocks and the yuan. Those gains were completely erased, adding to the worries of President Xi Jinping’s government as it struggles to handle China’s worst economic crisis since 1990. The troubles in the world’s second largest economy had the expected ripple effect, which was only made worse by negative developments in crude oil and commodity prices and the weakness of nearly every currency except the US dollar.
Both West Texas Intermediate and Brent futures fell below $30 a barrel for the second time. Sanctions on Iran sanctions may end as early as this weekend, leading traders of oil futures to factor increased supply into their calculations.
In the big picture, some are also seeing the rise of cheap solar and wind power as well as batteries and are anticipating the end of the age of oil. This is leading some funds to consider reducing the role of energy stocks in their portfolios. At the same time, a report from Goldman-Sachs says that the shutdown of production facilities due to low prices and the closing of shale oil producers, who have already been downgraded to junk credit ratings, will lead to a drop in supply and a new bull market in oil as early as late 2016. Warren Buffett is reported to be continuing his purchases of Philips 66 stock and other energies. Nevertheless, none of that long-term guessing is doing anything to support oil or stock prices today.
Industrial metals followed oil and other commodities down. Even gold is up only 1.5% despite an active safe-haven trade.
Fourth-quarter earnings have not helped boost stocks, despite a few bright spots. Results for S&P 500 companies are expected to show profits down for the third quarter in a row, with Q4 2015 the worst since 2009. US stocks and the economy overall are still great compared to the rest of the world, with low unemployment and a 7-month high consumer confidence report. However, ongoing anxiety about low wage growth is keeping consumers from spending at the levels needed to boost inflation to the Fed’s target 2.0%.
With the U.S. dollar dominating global currencies, particularly petro-currencies like the Canadian dollar, as well as the weak Chinese yuan, it is even more remarkable to see one particular acquisition take place today. A Chinese company formed in 1989 bought a smaller but visible part of an American icon founded nearly 100 years earlier.
General Electric Co. agreed to sell its home-appliances business to China’s Qingdao Haier Co. for $5.4 billion after a deal with Electrolux failed to go through last month. GE CEO Jeffrey Immelt sold the consumer-focused divisions that make stoves, washing machines and microwave ovens in order to focus on divisions making industrial products like gas turbines, oilfield equipment, and jet engines.
While Immelt’s decision to focus on oil-related machinery with oil prices tanking may seem counterintuitive, even more significant is the sale to Haier of much of GE Capital, the company’s lucrative lending division. To sum up, even with oil prices tanking and the Chinese economy in trouble and the US economy dominant, one of the most iconic American brands is selling its more visible consumer divisions to a relatively young Chinese company, so it can focus on making products that drill, process, or burn petroleum products.
As of mid-day Friday, General Electric stock was down over 2.5% on the NYSE and Haier Stock, on the Hong Kong exchange, was up 1.10%.
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