New Year Market Sell Off

Happy New Year! Following 2015’s losses of -4.67% (FTSE100) and -0.69% (S&P 500) the beginning of 2016 is look equally as dismal. The Shanghai Composite fell 7% in one day, prompting Chinese Government intervention and the FTSE100 is already down -3.32%.

Why?

China Growth
In China weak manufacturing data showing the sector contracting for its 10th consecutive month, and at an increasing pace. Chinese PMI is at 48.2, indicating contraction, where 50+ is expansionary. On top of this the Chinese authorities aren’t fighting the Yuan devaluation, indicating that the a low yuan is needed by the economy to help bolster exports. Both these events beg the question: Is the Chinese economy slowing down?

The Shanghai index is also particularly volatile. Accounting standards in China are feeble or non-existent, which leads to opaque balance sheets, in particular for state-run companies.  This means understanding the true value of the Shanghai index is nearly impossible.

UK Growth
In term of the FTSE 100 UK manufacturing data also weak with PMI falling to 51.9 from 52.5. This is down from October and November 55.5. Combined with the news from China the FTSE has been hit particularly hard.

Brexit
Fears of a UK exit from the Eurozone are possibly being filtered into the FTSE 100, with economists forecasting a Brexit would be damaging to UK growth.

Fed Hike
Following the recent Fed Hike in December there is still uncertainty in the market over the next hike, how big it will be and whether it will taper back the US recovery. It is thought this is being somewhat priced into the S&P500.

North Korea H-Bomb
The H Bomb threat isn’t a particularly strong one, however it provides a representation of overall geopolitical risk faced globally at this current moment in time. ISIS continue to be a threat and with increased airstrikes in the middle east there are questions over whether this will turn into a full blown conflict. As we known from a previous post on terrorism, conflicts damage markets.

p.s. H Bomb sell offs are historically good buying opportunities, as they are short lived.

Follow me on Twitter @ProdigyMarkets

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