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Today was meant to be a quiet start to the year. It has been anything but.
The first day of trading showed a strong risk-off move, with US equity markets beginning the year with one of their weakest starts ever and currency traders buying up yen.
The bad start to the year began following Saudi Arabia’s execution of Saudi cleric Nimr al-Nimr, a critic of the kingdom’s treatment of its Shiite minority. This escalated tensions between Iran and Saudi Arabia and added to mounting geopolitical risk in the Middle East. As strong words flowed back and forth between the two countries (and others, which butted in) oil prices went on a rollercoaster ride, with Brent crude rising to as high as $39 per barrel, having traded as low as $36.10 at the end of last year before the execution.
On the economic front, the release of China’s latest PMI, showed a modest miss relative to expectations, coming in at 48.2 versus 48.9 expected. Signs of further economic contraction in China, along with the imminent ban on share trading by major shareholders about to be lifted, sparked a significant fall in Chinese equities. After falling by 5%, the first circuit breaker was triggered, and trading eventually halted after the CSI-300 had fallen by 7% for the day.
Weak PMI data in the UK and US didn’t inspire much confidence in the economic outlook for developed countries either. It’s fair to say that many punters don’t have much conviction in the global economic outlook for 2016 and these series of events were enough to trigger a big risk-off move in markets in a generally illiquid trading environment,
In these conditions, the yen flourished. USD-JPY traded as low as 118.70, after being around 120.30 before the Chinese PMI data were released. There has been a recovery of sorts for the US dollar, with the cross currently sitting at 119.50. The US dollar has in fact been well supported against the other crosses, eking out small gains against the Swiss franc, Euro and Sterling.
It was a different story for EM and commodity currencies.
In the last 24 hours the NZD has been the hardest hit.
NZD/USD is down 2%, trading as low as 0.6720 just before sunrise, and currently sitting at 0.6740. The NZD was well overdue for a downward correction, following its strong spurt in December. In December, NZD/USD was up 3.8%, being the strongest performing major currency, despite lower risk appetite, falling commodity prices, and a narrowing NZ-US short rate spread.
The AUD has also been out of favour and has fallen more or less in line with the NZD. NZD/AUD fell to around 0.9340 yesterday afternoon, but has since risen to around 0.94.
If the first real day of trading is anything to go by, then 2016 is looking like an interesting year.
Buckle your seltbelts.
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Kymberly Martin is on the BNZ Research team. All its research is available here.
4 Comments
1. Global extraction of conventional oil peaked over 2005-2008, and since then the global system has been propped up by high-cost unconventional oil. Woops! Oil at $37 a barrel does not support high-cost extraction such as deep-water and extraction from Canadian tar sands. Junk bonds that supported expansion of fracking in the US are about to hit the wall of default as income continues to remain low..
2. Global debt bubbles have been kept under control for many years by lowering interest rates to close to zero, or actually negative in some countries! Negative interest rates are unprecedented in financial history and are unsustainable. The raising of the interest rate by the Fed was a political move rather than a financial one. Payment of interest is dependent on continuous expansion of use of oil and other resources, which is not going to happen in many locations. The Ponzi system will collapse at some stage and it could well be in 2016.
3. The quality of many resources continues to decline, leading to greater requirement of energy to extract and refine them. Low energy prices ameliorate this aspect in the short term but low energy prices generate another set of problems. Higher energy prices would make other components of the system less economic.
4. The rapid industrialization phase is over for China and the official figures are showing stalling. The real figures probably show negative growth...
5. World population increases about 200,000 per day, implying there are more people chasing declining resources.
6. Environmental degradation has reached a critical point which leads to catastrophe after catastrophe and ever-increasing cost of repair..
There are many other negative factors that would take hours to list.
It would be wise to brace for impact, and if it doesn't come this year feel temporarily relived because it will come before 2020.
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Worth a look at this https://www.youtube.com/watch?v=7nuzT3rchPU or search "Fischer FED at fault" on youtube.
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