World mar­kets back in sell-off mode

The Pak Banker - - MARKETS/SPORTS -

World mar­kets were back in sell-off mode on Tues­day as a 6 per­cent slump in Chi­nese shares fol­low­ing more weak data there and oil's slide below $30 a bar­rel again led to a re­newed bout of sell­ing.

The plunge in China capped a mis­er­able day for Asia, and Euro­pean bourses quickly fol­lowed suit, with shares in Lon­don, Frank­furt and Paris tum­bling 1.5 to 1.8 per­cent in a bumpy start to trad­ing.

In­vestors re­treated to tra­di­tional safe­haven plays, send­ing the Ja­panese yen back up against the dol­lar, gold higher and yields on two-year Ger­man govern­ment debt to record lows deep in neg­a­tive ter­ri­tory.

Derek Halpenny, Euro­pean Head of Global Mar­kets Re­search at Bank of Toky­oMit­subishi, said the drop in Chi­nese mar­kets was an­other blow to sen­ti­ment but it was the fresh oil slump that was prob­a­bly the big­ger con­cern.

"There was a nat­u­ral ques­tion af­ter the re­bound last week whether we were see­ing a turn­ing point," he said. "But this re­ver­sal again is prompt­ing in­vestors to think there is more to come of what we have had in the first three weeks of the year." Brent crude was down an­other $1.13 at $29.37 a bar­rel as early Euro­pean trad­ing gath­ered mo­men­tum, hav­ing dropped 5 per­cent on Mon­day. U.S. bench­mark WTI fell $1.03 to $29.31, hav­ing gone as low as $29.25 overnight.

The chair­man of Saudi Aramco, the world's big­gest oil pro­ducer, added fuel to the over­sup­ply story that has driven prices down 75 per­cent since their 2012 peak. He said on Mon­day the firm was con­tin­u­ing to in­vest in oil and gas pro­duc­tion ca­pac­ity de­spite other cost-cut­ting plans. A se­nior Iraq oil of­fi­cial said its now record high out­put could con­tinue to rise, while Kuwait's OPEC gov­er­nor said the or­gan­i­sa­tion could not make cuts if non-OPEC coun­tries were still crank­ing up their pro­duc­tion.

"Psy­cho­log­i­cal fac­tors have driven the se­vere volatil­ity in the mar­ket," said Kang Yoo-jin, a com­modi­ties an­a­lyst at NH In­vest­ment and Se­cu­ri­ties based in Seoul, who added the sit­u­a­tion was likely to per­sist un­til con­cerns over over­sup­ply eased. Asia's tur­bu­lent ses­sion saw main­land Chi­nese shares slump more than 6 per­cent to a 14month low in an­other sign that au­thor­i­ties in Bei­jing have their work cut out in their ef­forts to sta­bilise the fickle do­mes­tic mar­kets. There was more gloomy data, too, as China's an­nual rail freight vol­ume, viewed as a good tem­per­a­ture gauge of the gi­ant econ­omy, fell 11.9 per­cent last year ver­sus a drop of 3.9 per­cent in 2014.

The re­gion's heavy­weight in­dexes, Ja­pan's Nikkei and Hong Kong's Hang Seng In­dex fell 2.4 and 2.5 per­cent re­spec­tively too as the first two-day run of gains of the year came to a shud­der­ing halt.

"Wher­ever you look - China, oil and the U.S., there is no clear ev­i­dence of im­prove­ment in eco­nomic fun­da­men­tals," said Tat­sushi Maeno, man­ag­ing di­rec­tor at PineBridge In­vest­ments. "So in the near term, it is hard to ex­pect risk as­set prices to gain fur­ther." The big cur­rency mar­ket moves were inevitably in the emerg­ing mar­ket heav­ily linked to oil. A 2.4 per­cent drop sent Rus­sia's rou­ble back to­wards its re­cent record low, while the South African rand, the Turk­ish lira and most Asian units also drooped against the dol­lar.

Among the ma­jors, the dol­lar was mak­ing way as it fell against the low-yield­ing yen and euro.

There was some ex­tra cau­tion on the dol­lar ahead of the start of the first two-day meet­ing of the year of the Fed­eral Re­serve. In­vestors will comb the U.S. cen­tral bank's mes­sage to de­ter­mine what, if any, ef­fect volatile global mar­kets, plum­met­ing oil prices and fears of a Chi­nese slow­down will have on its pre­vi­ously stated in­ten­tions to keep rais­ing rates this year.

U.S. in­ter­est rate fu­tures im­plied that traders put the chance of a Fed rate hike this week at just 13 per­cent. Over the year, mar­kets are now pric­ing in only one hike, com­pared with the Fed's rate path, which fac­tors in at least four rises.

"There is a fair bit of ner­vous­ness go­ing into the Fed meet­ing. In­ter­est rate mar­kets have post­poned rate hikes in 2016 and 2017 so in­vestors ex­pect some­thing dovish from the Fed, given the volatil­ity in stock mar­kets," said Niels Chris­tensen, FX strate­gist at Nordea.

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