Stock markets from Shanghai to Mumbai proved how interconnected the global economy is by dropping, one after another, while oil rose on Middle East tensions.
By Vikram Rangala
Monday, January 4, 2016
It started in Shanghai where the market welcomed new safety protocols by triggering them, twice. China’s CSI 300 Index tumbled 5 percent in Monday trading, triggering a 15-minute halt. That proved to be just enough time for many investors, including those preparing for this week’s end of a ban on share sales by large stakeholders, to place more orders to exit before the full-day suspension kicked in at 7 percent. Fifteen minutes later, the market sold off in just seven minutes to reach the limit amid high volumes.
Few wanted to wait and see what Wednesday will bring. China’s circuit breakers are meant to bring some stability to one of the world’s most volatile equity markets, but instead they seem to have galvanized the panic. The US and other markets have similar circuit breakers but their thresholds are much larger. It takes a 20% move to halt trading on the S&P or Dow for a full day. If China’s limits had been in place last year, they’d have been triggered at least 20 times.
Stock markets around the world headed for their worst opening day of trading in at least three decades. Emerging markets took the biggest hits, sliding the most since August. Meanwhile, a survey of 100 economists commissioned by Brazil’s central bank concluded that country is now headed for its deepest recession since 1901, as the government faces impeachment and a massive corruption scandal.
The Dow Jones Industrial Average sank more than 440 points, with the S&P 500 down nearly 50 points and the Nasdaq 100 down over 130. In Europe, the Stoxx 50 and DAX both gapped down with the DAX down over 450 points. As you might expect, the CBOE Volatility Index was up 12%, reflecting a volatile start to 2016 across the board. The turmoil in China reflects larger concerns which trace back at least to the devaluation of the yuan in August 2015 and the lackluster manufacturing numbers of the past year. What China is struggling to achieve is a different 7%: the 7% GDP growth it needs to maintain to remain the world’s second largest economy.
Meanwhile, crude oil prices jumped briefly after Saudi Arabia and Bahrain cut ties with Iran. Stocks in Gulf nations joined the global trend downward. Bonds and gold moved higher and the yen rallied on safe haven buying. However, by mid-morning crude had given up much of its early gains.
It’s telling that the rally in oil has not been more substantial, given that this breakdown between Iran and Saudi Arabia is the biggest crisis between the regional powers since the late 1980s, when the Saudi embassy was attacked and the kingdom suspended ties with Iran following the death of Iranian pilgrims during Hajj in Mecca. Saudi Arabia backed fellow Sunni Arab Saddam Hussein in his war against Iran before giving support to the US during the first Gulf War.
During those crises and more recent ones, you could almost count on a rally of five dollars or more in crude oil prices. Instead, the worldwide glut is putting so much downward pressure on oil prices that even a major crisis can’t push them up. U.S. crude stockpiles expanded at a record rate in the latest reporting period and the Organization of Petroleum Exporting Countries, of which both Saudi Arabia and Iran are members, have no intention of limiting their output.
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