Weekly Market Commentary: January 11, 2016

Provided by geralt/Pixabay
Provided by geralt/Pixabay

The People’s Bank of China (PBOC) started the New Year with a downward currency adjustment and fireworks followed.

Last week, three distinct issues affected China’s stock market. First, the PBOC’s devaluation of the yuan (a.k.a. the renminbi), along with the knowledge the central bank had been spending heavily to prop up its currency in recent months, led many analysts and investors to the conclusion China’s economy might not be as robust as official reports indicated, according to the Financial Times.

Not everyone was surprised by this revelation. During the fourth quarter of 2015, The Conference Board’s working paper entitled Global Growth Projections for The Conference Board Global Economic Outlook 2016 reported:

“China’s economy grew much slower than the official estimates suggest in the recent years. During the last five years, our estimates suggest an average growth of 4.3 percent, which is substantially lower than the official estimate of 7.8 percent. In 2015, we project China to see an average growth of 3.7 percent, which is indeed lower than the official target of 7 percent.”

Second, state-run media made it clear the Chinese government would not step in to spur growth. Allowing market forces to play out is a requirement of the reforms international investors have been demanding of China, according to Barron’s. The publication suggested Chinese President Xi Jinping is the victim of a Catch-22. The Chinese government took steps toward reform and international investors responded by selling shares in a panic:

“Weaning China off excessive credit, investment and import-led growth in favor of services means slower growth. Markedly slower, in fact, than the 6.5 percent Beijing is gunning for this year. But Monday’s 7 percent stock rout shows international investors want it both ways. The rapid growth, innovation, and disruptive forces that capitalism produces? Yes. The downturns and volatility that come with it? Not so much.”

The third factor was China’s new and very strict stock market circuit breakers, which were introduced on January 4. The circuit breakers were intended to calm overheated markets, but they sparked panicked selling instead. When the Shanghai Shenzhen CSI 300 Index falls 5 percent, Chinese stock trading stops for 15 minutes. When the index is down 7 percent, trading stops for the day. A similar mechanism is employed in U.S. markets, which are far less volatile. However, trading is not delayed until the Standard & Poor’s 500 index has fallen by 7 percent, and it does not stop until the index is down by 20 percent. Last week, China’s stock markets closed twice as investors, who were worried the circuit breakers might kick in, rushed to sell shares.

China suspended its circuit breakers on Thursday, and the PBOC set the value of the yuan at a higher level. That helped China’s stock markets, and others around the world, settle. China’s markets gained ground on Friday, although U.S. markets finished the week lower. Markets may continue to be jittery next week as “a tsunami of negative psychology driven by China” works its way through the system, reported Reuters.

Data as of 1/8/16 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) -6.0% -6.0% -6.8% 9.7% 8.7% 4.1%
Dow Jones Global ex-U.S. -6.1 -6.1 -11.1 -2.6 -2.0 -0.5
10-year Treasury Note (Yield Only) 2.1 NA 2.3 1.9 3.3 4.4
Gold (per ounce) 3.7 3.7 -9.4 -12.7 -4.2 7.4
Bloomberg Commodity Index -2.3 -2.3 -26.0 -17.8 -13.5 -7.6
DJ Equity All REIT Total Return Index -3.0 -3.0 -4.6 8.8 11.1 6.5

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Weekly Market Commentary: October 27, 2015

Provided by geralt/Pixabay
Provided by geralt/Pixabay

Central banks were at it again – and markets loved it.

Last week, European Central Bank (ECB) President Mario Draghi surprised markets when he indicated the ECB’s governing council was considering cutting interest rates and engaging in another round of quantitative easing. The Economist explained European monetary policy was heavily tilted toward growth before the announcement:

“The ECB is already delivering a hefty stimulus to the Euro area, following decisions taken between June 2014 and early 2015. It has introduced a negative interest rate, of minus 0.2%, which is charged on deposits left by banks with the ECB. It has also been providing ultra-cheap, long-term funding to banks provided that they improve their lending record to the private sector. And, most important of all, in January it announced a full-blooded program of quantitative easing (QE) – creating money to buy financial assets – which got under way in March with purchases of €60 billion ($68 billion) of mainly public debt each month until at least September 2016.”

Despite these hefty measures, recovery in the Euro area has been anemic, and deflation remains a significant issue. According to Draghi, Euro area QE is expected to continue until there is “a sustained adjustment in the path of inflation.” Europe is shooting for 2 percent inflation, just like the United States.

The People’s Bank of China (PBOC) eased monetary policy last week, too. On Monday, data showed the Chinese economy grew by 6.9 percent during the third quarter, year-over-year. Projections for future growth remain muted, according to BloombergBusiness. On Friday, the PBOC indicated it was cutting interest rates for the sixth time in 12 months.

U.S. markets thrilled to the news. The Dow Jones Industrial Average, Standard & Poor’s 500 Index, and NASDAQ were all up more than 2 percent for the week. Many global markets delivered positive returns for the week, as well.

Data as of 10/23/15 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) 2.1% 0.8% 6.4% 13.7% 11.9% 5.6%
Dow Jones Global ex-U.S. 0.6 -2.5 -3.3 3.2 0.4 2.0
10-year Treasury Note (Yield Only) 2.1 NA 2.3 1.8 2.6 4.5
Gold (per ounce) -1.7 -3.2 -5.8 -12.1 -2.8 9.6
Bloomberg Commodity Index -2.6 -16.2 -25.4 -15.4 -9.8 -6.4
DJ Equity All REIT Total Return Index 1.2 2.4 8.1 11.6 11.7 7.9

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Investment Directions: A Symphony of Uncertainties

Provided by Carlo Alberto Cazzuffi/Wikimedia
Provided by Carlo Alberto Cazzuffi/Wikimedia

The word symphony is derived from the Greek word symphonia, and before the word settled on its current melodic meaning in the 17th century, it was used to convey compatibility between opinions or actions. Today, tensions stemming from high debt loads and too little growth—not just in Greece but also China and Puerto Rico—are reaching a crescendo and seem to be some ways off from a resolution.

First Movement: The Greek Impasse

Clashes culminated in early July with the Tsipras administration’s unexpected calling of a referendum and Greek voters’ rejection of European creditor demands. Although a short-term deal was brokered to pull Greece back from the brink of financial collapse, Europe stood its ground on austerity. It is hard to tell how things will play out, but this much is clear: A prolonged period of uncertainty will probably accompany negotiations, as long as a Greek exit from the eurozone is in play.

Second Movement: The Chinese Volley

Greece is not the only country beset by uncertainty. Momentum in the high-flying China A-shares market has been broken, though a summer deluge of support measures from the People’s Bank of China (PBOC) ultimately had some stabilizing effects. After the latest selloffs, however, China H-shares, which are traded in Hong Kong, appear to offer some relative value.

Third Movement: The Volatility Effect

Financial markets at times responded nervously to the Greek and Chinese events, but we think most of the impact will be short-lived. The focus on Greece and China has obscured the facts that the Greek economy is very small, and China A-shares are mostly held by domestic investors. We believe that longer-term damage to the global economy or markets is unlikely.

Fourth Movement: The Search for Value

The widespread aversion to risk renewed some appetite for safe haven bonds, as did changing expectations of when the Federal Reserve (Fed) will act on interest rates. Despite that, we still believe stocks will fare better than bonds and are inclined to look internationally and to cyclical sectors for the most compelling equity opportunities.

For the full report, please click on the source link below.

Written by Russ Koesterich of BlackRock

(Source: BlackRock)