It has been the worst start to a year on record, but a flurry of economic data due this week might show fear has driven sellers too far. The oil price tumbled to below $30 a barrel last week as sanctions on Iran were lifted; the country is now free to pump its share of oil into the already oversupplied market. Also, we should not forget that the US has started exporting West Texas Intermediate crude to the world as well, for the first time in 40 years.
However, weak oil prices alone are not enough to proclaim doom. As with all parts of the economic price system, this situation has advantages and disadvantages, winners and losers. Oil being low is good for developed markets and their consumers , and poor for those (mostly developing) nations that sell crude. It should stimulate developed economies, albeit at the expense of some emerging markets. Like all prices, the barrel price of crude is a function of demand and supply, and in this case, oil stockpiles continue to hit new record highs. While global demand has fallen slightly, we believe many investors are reacting as if a global recession is nigh, which is contrary to all evidence.
The S&P 500 fell 8% in local currency price terms in the first two weeks of 2016; the FTSE All-Share is down 7%. On the continent, the Euro Stoxx has fallen 9.6%; in the Far East, the Topix has dropped 9.4%. China continued to be the epicentre of it all: the Shanghai Stock Exchange Composite has plummeted 18%.
These significant falls are based on continued surprisingly high jobs growth in the US, rising retail sales in the US, Europe and UK, and healthy expansion in services PMIs. More data are out this week, which we hope will reinforce these comforting trends. December US housing starts are released on Wednesday, alongside an inflation print. On Thursday, there’s the Philadelphia Fed Business outlook for January. UK inflation data come out tomorrow, while average weekly earnings are due Wednesday – let’s hope for signs of greater wage growth!
The fourth-quarter results season in the US kicked off late last week, with banking giants Citigroup, Wells Fargo and US Bancorp releasing reasonable figures. But markets continue their obsession with China. This means the most important tone-setter for markets is likely to be the Chinese retail sales numbers out tomorrow. They are expected to show 11.3% growth. If this target is hit or exceeded, markets may start to find some support, if not they may slump further. China’s leaders have already leaked Q4 GDP growth figures, which beat the 6.8% consensus by 0.2 percentage points. The official release is also due tomorrow, hopefully retail sales are equally stout.
The start of the year has been miserable for investments, but it is important to remember that the world has never slipped into a significant bear market without the US falling into recession as well. Economic data do not support that happening, despite the bumpy ride. We believe this volatility will pass.
If you have any concerns regarding your investment portfolio and its assets, please feel free to contact us with your concerns.
Kind regards,
Private Fund Management
T: +351 289 392 484
W: privatefundmanagement.com
