Circuit-Breakers Trip Trading Activity on Day One of 2016
2016 was shaping up to be a year of recovery for the embattled energy and metals sectors. The Chinese economy had endured one of its worst periods in recent history after $5 trillion was wiped off the markets between July and September 2015, followed by a series of unprecedented interventions aimed at restoring stability to the Chinese economy. These included a 6-month ban on any trading activity by executives, high-level shareholders and other corporate entities for anyone with more than 5% stock holdings in a company.
This was done back in July 2015 in an effort to prevent a further slide in the Shenzhen Composite Index and the Shanghai Composite Index - both of which opened up to an inglorious trading day on 4 January 2016. The expiration of the 6-month ban coincided with the plunge in equities, with alarm bells sounding when 7% declines were recorded. The Chinese stock market threshold for a shutdown is significantly lower than it is on Wall Street and elsewhere. The S&P 500 index will only close for 15 minutes when declines of 7% - 13% are recorded, and if the markets plunge by more than 20%, they will be shut down for the day. This is known as the circuit breaker on the equities markets.
How are emerging market countries/currencies impacted by China weakness?
Since China is the world's #2 biggest economy what happens in China has a dramatic and unprecedented effect on the economies of emerging market countries. This is especially true of countries that supply China with essential raw materials such as copper, iron ore, coal, natural gas, oil etc. The Chinese government is in the midst of transforming the economy from one which is growth oriented on an international level (export-driven growth), to one which is focused on growing the domestic economy in terms of services and demand. The 180° pivot in China's macroeconomic plan has taken emerging market countries by surprise. Imports and exports have declined precipitously and this has impacted upon the production capacity and revenues of major mining and energy companies across Africa, Latin America and Asia Pacific. Weak oil prices are not helping commodity prices in general as oversupply continues to burden the global economy, with increasing inventory levels continuing to push prices lower. Just recently, the Dow Jones sank 1.5% to 16,895, the S&P 500 shed 1.5% and the NASDAQ dropped 1.6%. Much the same is true across Europe, with major bourses also ending lower on the back of weak economic performance in China. According to the CAIXIN index in China, the PMI dropped to 50.2 in December, barely above the crucial 50 level which separates a growing economy from one that is contracting.
China and Emerging Market Currencies
The interrelatedness of the global economy is something that cannot be neglected when evaluating the interactions between currencies. For example the Fed is expected to implement a series of interest-rate hikes over the course of 2016, gradually moving towards the 1% + target by the end of the year. With every additional rate hike, the USD strengthens and emerging market currencies lose favour. An important barometer of sentiment towards emerging market currencies and countries is the Vanguard Emerging Markets Stock Index Fund. This fund dropped 2.9% in recent days, highlighting the real concerns that traders and investors have about the precarious predicament of emerging market countries. Major declines have been reported over the past year with currencies like the Venezuelan bolivar, the Turkish lira and the South African rand. These are expected to continue in 2016 as dollar strength, euro strength and pound strength will trump that of EM currency strength. It is true that money managers are making a conscious effort to avoid developing countries at this time. There is simply too much volatility, uncertainty and global weakness to warrant substantial investments in these countries.