Investment Week in Review - 11 January 2016

By Marcus Damen - January 11, 2016

News in Review

  • The Caixin-Markit (previously HSBC) manufacturing Purchasing Managers Index unexpectedly dropped to 48.2 in December from 48.6 in November, exacerbating fears of China’s slowing economic growth. 

  • The Chinese government’s six-month ban on share sales by major investors (introduced in July last year) came to an end adding to volatility in that market as more investors were able to sell out of the market.  

  • China’s Consumer Price Index rose 1.6% in the 12 months to December 2015, about half the government’s target for 2015, leaving policy makers more room to add to their record stimulus to help boost flagging growth.

  • The Chinese central bank further extended the permitted trading range for the Yuan against the USD, resulting in the currency being devalued to a six year low against the USD. 

  • Building approvals in Australia fell 12.7% in December as multi-dwellings in Victoria dragged on the index. 

  • The U.S. unemployment rate remained steady at 5% with the participation rate increasing from 62.5% to 62.6% as 292,000 jobs were added in December.  Wage growth, however, disappointed as the average hourly wage declined from $25.25 to $25.24. This was due to most of the job additions coming from workers gaining part-time, low wage positions. 

  • Japan's Core Consumer Prices Index edged up by 0.1% in November from a year earlier after three straight months of declines, as broadening price increases for food and grocery items offset some of the pressure from slumping energy costs.

Comment

Global equity markets have started 2016 with significant weakness and there has not yet been a positive day on the Australian stock market.   The Shanghai composite (China’s largest stock market) has been the worst hit, down -12.3% and Australia and the US both recorded their worst first week for a calendar year ever.

The major catalyst for the sell-off in China was poorer than expected Manufacturing data and continued devaluation of the Yuan.   Further, the government implemented a circuit breaker for the stock market (whereby the market would automatically close with a daily fall of 7% or more) which appeared to backfire and increase volatility rather than reduce it.

While this is far from the start that investors would hope for, it does not provide any real indication of what is in store for the remainder of the year.   According to US data, the first trading day of the year has no predictive power in that the stock market finishes the year in the same direction only 50% of the time.  A bad first week would not change those odds significantly, however should the market remain weak for the full month then history suggests a 70% chance that the stock market could end down for the year.

As we know, past performance does not guarantee future returns so this statistic is little more than an interesting snippet to ponder.

While the direction of the market is always difficult to predict, it is fair to expect that volatility will continue to remain elevated until investors have a greater level of understanding and comfort with the financial situation within China.

The Week Ahead

  • US: Retail Sales and Producer Price Index data for December will be released. 
  • Australia: Employment data for December is due.
  • China: Trade balance data for December is due.
  • Eurozone: Eurogroup meetings will be held. 
  • UK: The Bank of England will release the Official Bank Rate; Manufacturing Production data for November is due
  • Japan: Current Account data for November will be released.

Company News:

  • Dick Smith announced that they have voluntarily entered receivership as the company is no longer able to service its debt obligations. 

  • Oil and gas producer Origin Energy shipped the first cargo from its Australia Pacific liquefied natural gas (LNG) facility at Curtis Island in north Queensland.

Markets in review

   
 

First week of 2016

Financial Year  to 31 Dec 15

Calendar Year    to 31 Dec 15

ASX 200 (Acc)

-5.76%

-0.53%

2.56%

US S&P 500

-5.96%

-0.93%

-0.73%

Japan Nikkei

-7.02%

-5.94%

9.07%

UK FTSE 100

-5.28%

-4.27%

-4.93%

MSCI World

-6.09%

-4.20%

-2.74%

German Dax

-8.32%

-1.85%

9.56%

French CAC

-6.54%

-3.20%

8.53%

Shanghai Comp

-9.97%

-17.26%

9.41%

$1 Australian buys you:

   $0.6978
£0.4804
¥4.5971
¥81.9275
€0.6394
$1.0686

ASX200 Sector Performance for the Week

sector performance chart

 

 

Disclaimer

 
This material is intended for the use of the clients of Pitcher Partners Investment Services only.  It is current at the date of preparation, but may be subject to change.  This document does not constitute financial product advice.  It is of a general nature and has been prepared without taking into account any person’s objectives, financial situation or needs.  Before acting on the information you should consider the appropriateness of it having regard to your objectives, financial situation or needs and seek independent advice.  You should obtain and consider a Product Disclosure Statement in relation to any financial product before making any decision about acquiring the product.  To the maximum extent permitted by law, Pitcher Partners Investment Services Pty Ltd and its representatives will not be liable for any loss or damage incurred by any person directly or indirectly for any use or reliance on this document.

 


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