Chinese hysteria drives market lower

Could the Chinese selling which has been driving markets lower affect the Fed's thinking, and as the price of oil rises, Middle Eastern rifts begin to appear.

Chinese business district
Source: Bloomberg

If markets abide by the mantra of starting as you mean to go on, we could be in for a seriously messy 2016, after global indices tumbled on the first trading day of the year. The root of today’s market hysteria was no doubt borne in China, where stocks fell 7%, causing trading to halt under a new ‘circuit-breaker’ mechanism. While the Caixin manufacturing PMI reading pointed towards continued weakness in the sector, today’s selloff is as likely to be reflecting the expected reaction to the impending end of a six-month lockup period for institutional investors share sales. Unfortunately for Chinese regulators, they seem to be learning slowly that less is often better than more when it comes  to controlling the stock market.

Selling across the developed market is something that still had one foot in 2015, with the final days of the year having seen significant losses. Despite the attempted recovery seen through the second-half of December, markets look primed for further losses. With the Dow Jones in line for its biggest opening day fall in percentage terms since 1922, the definition of ‘gradual’ could be stretched somewhat by the Federal Reserve should we see selling continue.

Oil prices have begun to show some signs of life, with heightened tensions in the Middle East threatening to cause yet more instability in a region already rife with war and conflict. The split of nations across religious lines is causing the severing of diplomatic ties, with Saudi Arabia and Iran at the centre of this current dispute. With Iran representing the latest entrant to the oil market after years of sanctions, the threat of disruptions to supply will no doubt cause downward revisions to the demand and supply picture for crude, which is in turn driving marginally higher prices.

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