The year that “could not have started better”: oil, stocks sink, EMs plunge, confidence evaporates

It was just over a month ago that the Fed convened for their long-awaited December meeting to announce the first interest rate hike in over seven years, marking the end of the ultra-low interest rates policy. The decision was hailed by investors across the globe, with both emerging markets and developed countries’ equities, commodities rallying. The hype, though, was short-lived. Already before the New Year’s break, there was the first harbinger of a forthcoming storm, with global equities sliding on Monday, December 28, and oil floating in the worrying vicinity of an 11-year low [again]. Some three days later, 2015 was officially closed, becoming the first year since 2008 to see S&P decline over the year. While this was already a stirring call for investors, it was not until about a week later that the market observers worldwide were forced to admit the full-blown hit that marked the beginning of 2016 and put the world on yet another rollercoaster of precipitating prices.

What ensued in the subsequent several weeks can be reasonably well described as a downward spiral of oil prices and investor expectations. While the initial spark that lit up the fire may have come from aggressive China’s policy decision in relation to offshore yuan trading (read more here), what followed can be well depicted as an interplay of these two factors.  With the Chinese economy showing further signs of slowing on the early days of January, investors retreated to safe havens, bolstering prices for both gold and Treasuries [thus reducing yields – edit.]. Broad sell-offs on the Chinese markets pushed down the returns, causing further deterioration of investors’ mood and contributing to even deeper drops in commodities’ prices. More generally, investors started to shift to safer assets, speedily getting rid of both foreign and domestic equity [which is generally considered more risky – edit.]. On Friday, January 8, the S&P 500 index fell 6% at the week-end, making it the worst first-week-of-the-year on record. The subsequent Monday, Brent was trading at below $32 per barrel, for the first time in 12 [!] years.

The following day started on a dismal note coming from another part of the world. Weak economic data from the UK added to the mounting pressure on the pound that has been falling against other majors [trading jargon for most popular and widely traded currencies – edit.] for the last several weeks. The remainder of the day was still dominated by China though, as both Brent and WTI tested the $30 threshold. In the following several days Wall Street saw a rebound, as oil prices lingered back in the “safe zone” (if one can call so the near-$32 range).

Once again, the respite was short-lived. Today, January 20, oil is once again trading at below $28 a barrel in response to weak economic data from Beijing. Both European and Asian stocks fell on the news, and Treasuries’ yields dropped to below 2%, thus signaling capital movements towards safer assets [lower yields imply higher prices that in turn gauge an increased demand – edit.] The data leave little hope for the US market later this day, but as trading just started several hours ago, it is too early to state anything conclusive.

One thing that can be concluded is that investors worldwide are definitely having hard times of their lives, being forced to make hard choices in a rapidly changing environment “where everything appears to be falling”. Together with them, managers and politicians should ponder, too. The Davos forum that is currently underway will inevitably witness quite a few debates and discourses about the way the world should be moving forward. Moving away from cold Switzerland and to the much warmer region of the Gulf, the ruling class there have quite a lot to consider as well. Abolishing the trading embargo with Iran will not only be the next milestone in a long-lasting political game, but will also likely provide a major blow to oil prices, further destabilizing the world’s economy and crippling the limping recovery. With so many concurrent issues that need to be reconciled, there is always a hope that the invisible hand with ultimately conquer the chaos and uncertainty that have enshrouded the markets.