In one of my last articles of 2015, mid-way through December, I had indicated that the volatility witnessed in the latter part of 2015, most notably in Q415, could well be experienced sporadically in 2016, whilst also highlighting the fact that markets were seemingly fragile.
“It is therefore safe to say that the volatility and large price movements and fluctuations we have witnessed over the past few weeks, and the market’s eagerness to closely scrutinise incoming economic data is pretty much testament to the fact that markets are in a fragile state.”
Equities, currencies, commodities, emerging markets, bonds (both investment grade and high yield) are amongst the key asset classes which had their fair share of volatility in 2015, lending itself in the main to technical factors (demand and supply, trading aspects) from one end and fundamental factors (such as heightened inflationary and growth expectations, to name a few). But few would have envisaged what the first trading session of 2016 would have in store for most investors.
In what is being described as one of the worst opening to a year in over three decades, Chinese equities tumbled over seven per cent as Chinese PMI Manufacturing data fell below consensus expectations.
Furthermore, economic data out of Germany, the Eurozone’s largest economy indicated that Draghi’s expectations of upward inflationary pressures in the single currency region may have been a bit too optimistic in his last month’s December 3 MPC press conference. Having said that, the manufacturing industry in Germany showed signs of growth, with the Markit index up marginally to 53.2 from the previous data print of 53.
Across the Atlantic, manufacturing data in the US showed that the industry contracted (market consensus had previously indicated an increase from the previous month), sending US equities sharply lower on the first day of 2016.
Adding to this market turmoil is the recent tension between Saudi Arabia and Iran, which has been one of the major catalysts behind the weak sentiment, uncharacteristic for this time of the year. The Eurostoxx 50, S&P 500 Index and China’s Shanghai composite index were all down by 3.14 per cent, 1.53 per cent and 8.2 per cent respectively in yesterday’s trading session alone.
In this sharp reverse in risk aversion, markets witnessed a marked flight to high quality, lower risk assets, with investment grade bonds (particularly sovereign bonds) as well as Gold benefitting from a healthy price gains.
The yield on the Benchmark 10-Year German Bund was 6.3bps lower yesterday whereas the yield on the US 10-Year Treasury dropped by 3.4bps.
On the data front, we’ve got quite a pretty data laden week too coming, with inflationary data, confidence indicators, retail sales and unemployment in the Eurozone, services PMI, durable goods and unemployment data in the US coupled with services PMI and inflationary data prints in China. Quite an interesting start to the year I must say.
Disclaimer: This article was issued by Mark Vella, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.