On 06 January, 2016 – Stocks retreat globally on growth worries

Global stocks retreated once again on Wednesday. The reasons were the same — concerns for China and global growth along with sinking oil prices. North Korea’s announcement that it set off a hydrogen bomb added to investor angst, however confirmation from other sources is lacking.

United States

United States markets dropped Wednesday as investors fretted about signs of belligerence from North Korea and more weakening of China’s economy, which pummeled energy companies. The losses were broad. The Dow Jones industrials were down 1.5 percent, the S&P retreated 1.3 percent and the Nasdaq lost 1.1 percent. The international news outweighed some solid hiring data in the United States. The payroll processor ADP said businesses hired 257,000 workers in December, the most in a year. The ADP report covers only private businesses.

Drags on investor confidence were numerous. The government of North Korea announced that it had conducted its first successful test of a hydrogen bomb, but the claim was met with widespread skepticism. Later in the day, the White House said Wednesday that initial data from its monitoring stations in Asia were “not consistent” with North Korea’s claim that the nuclear test it carried out earlier in the day was its first test of a hydrogen bomb. The act was condemned by the United National Security Council.

A monthly survey of China’s service industries slipped to a 17-month low, renewing fears that the world’s No. 2 economy is facing stronger headwinds. The signs of weakness in China, a major consumer of energy, pummeled oil prices.

China's People’s Bank of China set the central parity rate for yuan at 6.5314 per US dollar, compared to Tuesday's reference rate of 6.5169. The announcement drove the yuan to a five year low against the US dollar. The services sector in China remained in expansion in December, albeit at a slower pace with a 17-month low PMI reading of 50.2, down from 51.2 the month before. Traders and economists fear the yuan's depreciation may mean that China’s economy is even weaker than had been expected and that it could trigger another wave of competitive devaluations around Asia and in other key economies.

The Federal Reserve published the minutes of the December FOMC meeting. At that meeting, the FOMC voted to increase its fed funds interest rate range to 0.25 percent to 0.50 percent from zero to 0.25 percent. While the vote to increase rates may have been unanimous some members said it was a close call. Inflation remains a trouble spot and though nearly all of the 17 participants were reasonably confident that it would move back to 2 percent, some said risks remain considerable. The committee’s outlook on employment was positive with most expecting this year's unemployment rate to remain below its long-run level. The FOMC remains data dependent, pointing to a gradual tightening while adjusting to economic conditions.

These data reflect observations at 4:00 PM US ET. Gold at the afternoon London fixing was up US$14.40 to US$1,091.40. Copper futures were down 0.4 percent to US$2.09. WTI spot crude was down US1.99 to US$33.98. Dated Brent spot crude was down US$2.15 to US$34.27. The US dollar was up against the pound and the Canadian and Australian dollars. However, it declined against the yen, euro and Swiss franc. The Dollar Index was down 0.1 percent. The yield on US Treasury 30 year bond was down 7 basis points to 2.94 percent while the yield on the 10 year note declined 8 basis points to 2.17 percent.

Europe

Stocks retreated again on Wednesday with mining and resource stocks under heavy pressure due to concerns over the health of the Chinese economy. Energy stocks were also weak after Saudi Arabia slashed prices for European customers in a bid to hurt Iran. The Saudis are desperate to retain market share as Iranian oil comes online following years of heavy sanctions. The FTSE and SMI were down 1.0 percent while the CAC declined 1.3 percent and the DAX lost 0.9 percent.

Chipmakers were under pressure after the Nikkei business daily reported that Apple is expected to cut output of its latest iPhone 6 and 6s plus models by about 30 percent in the first quarter of this year. Infineon Technologies and Dialog Semiconductor declined amid worries concerning supplies to Apple. Automakers BMW, Daimler, Volkswagen, Continental, Peugeot and Renault retreated. ThyssenKrupp and Salzgitter weakened. In Paris, advertising firm Publicis Groupe and JCDecaux tumbled on broker downgrades. Technip and Total finished lower. In London, chipmaker ARM Holdings was down. Kingfisher climbed on a broker upgrade. Mining stocks were under pressure due to concerns over China's economy. BHP Billiton, Rio Tinto, Anglo American and Glencore retreated. Also lower were BG Group, BP, Royal Dutch Shell and Tullow Oil.

December composite PMI climbed to 54.3 from 54.2 in November. Germany's private sector expanded at the fastest pace in 17 months but French service providers reported a reduction in activity for the first time in almost a year. Although the British service sector expanded at a solid pace in December, underpinned by a sharp rise in new business, the pace of growth eased slightly from November as expectations slid to a near three-year low.

Asia Pacific

Most Asian stock indices declined Wednesday even though Chinese shares posted strong gains on expectations a ban on stock sales by major shareholders will remain in place beyond this week's expiration date. Stocks elsewhere across Asia ended mostly lower as news of a possible nuclear test in North Korea, falling oil prices and a substantially weaker fixing for the yuan sent investors fleeing for safety.

The Shanghai Composite rebounded 2.3 percent after state media said a ban on short sales, due to expire Friday, would remain in place until the China Securities Regulatory Commission (CSRC) implements a new policy to manage the pace of stakeholder sales. Investors shrugged off December’s services PMI that indicated a slowdown in the growth of service sector. The Caixin China General Services PMI reading was 50.2, a 17-month low and down from 51.2 in November. The yuan plunged to a five year low against the US dollar in offshore trading after China's central bank set the central parity rate for yuan at 6.5314 per dollar, compared to Tuesday's reference rate of 6.5169. The Hang Seng lost 1.0 percent.

The Nikkei retreated for a third day after oil resumed declines and the yen vaulted to a near three-month high against the US dollar in the wake of weak economic data from China and rising tensions in the Middle East. The Nikkei was down 1.0 percent. Shares of Apple suppliers fell after the Nikkei business daily reported that the tech giant is expected to cut output of its latest iPhone 6 and 6s plus models by about 30 percent in the first quarter of this year. Sharp, TDK, Japan Display and Alps Electric declined.

Australian shares fell for a fourth day as Chinese concerns lingered. Both the S&P/ASX and All Ordinaries dropped 1.2 percent. Miners declined on falling iron ore prices. The Kospi was down 0.3 percent after North Korea said it had successfully tested its first hydrogen bomb, a more powerful type of nuclear weapon than the North has previously tested. The Sensex was 0.7 percent lower as a slew of factors such as oil price volatility, rupee weakness, a substantially weaker fixing for the yuan, weak Chinese data and news of a possible nuclear test in North Korea sent investors fleeing for safety.

Looking forward

Australia posts November merchandise trade data. The Eurozone releases November retail sales and unemployment. Germany posts November manufacturers’ orders. In the US, weekly jobless claims, money supply and Fed balance sheet will be reported.

Please remember, the value of investments and the income from them can do down as well as up. Funds that invest in overseas markets may be subject to currency fluctuations. Investments in small and emerging markets can be more volatile than other overseas markets. Reference in this document to specific securities should not be construed as a recommendation to buy or sell these securities, but is included for the purposes of illustration only.