Entering the fear market

Market participants in global stocks will want to forget the horrendous first two weeks of 2016 as global equity indices fell sharply in the period.

US Flag
Source: Bloomberg

The trigger point was the selloff in the Chinese markets amid fears of more yuan devaluation. But there was really nothing much to boost other markets. US markets continued to face challenges of weak corporate earnings and strong USD, providing few impetus to push higher.

With the increasing inter-connectedness of global markets, movements in China’s relatively closed capital markets reverberate throughout the world. Fear dominated the first two weeks. The VIX index leaped to a three-month high of 27, jumping around 30% year-to-date.

The self-perpetuating distress then played in a feedback loop, putting global markets in a death grip. Recent macro data suggested that we could see more deterioration in the global economy before things get better. RBS came out to scare investors with a ‘sell everything’ doomsday message.

Although it is worthwhile to remember that markets are not usually rational, especially in the short run. Of course, this is scant comfort to many fund managers or speculators who find it increasingly hard to make money in the financial markets.

The $1.5 billion Nevsky Capital, an iconic hedge fund, has decided to cease managing its Nevsky Fund as global trends over the last few years conspired to work against Nevsky’s pre-conditions for successful fundamental investing.

Traders will have their hands full next week, as a number of macro data comes into view, and as the US earnings season swings into full mode. They will also watch keenly how the Chinese markets will move, after a 16% tumble in CSI 300 in the first two weeks of 2016.


US earnings season

US markets will be closed on Monday, 18 Jan for Martin Luther King’s Day. So far, 25 companies on the S&P 500 has reported their latest quarterly earnings, with another 7 announcing tonight, including Intel Corp, Blackrock, Citigroup, and Wells Fargo. There will be 42 firms reporting in the coming week, with focus on General Electric, IBM, Morgan Stanley, Goldman Sachs and Unilever.

Corporate earnings are widely expected to remain unimpressive, as the strong dollar continues to weigh on US exporters and company earnings abroad. Factset estimated that Q4 earnings of S&P 500 firms will fall -4.7% YoY.


China GDP

China is scheduled to report its Q4 and full year GDP on Tuesday, 19 January, with a reading of 6.9% expected for both quarterly and annual growth. While recent outperformance in trade figures suggests stabilisation in the economy, I expect the slowdown theme to continue, as China transits to a consumption-based growth model.



The European Central Bank is expected to keep its policies unchanged during the first 2016 meeting on Thursday, 21 January. However, markets will watch for fresh hints on whether more easing action is required as a renewed decline in oil prices may have made recent inflation forecasts outdated. Inflationary pressure remains elusive.


Other events to watch

  • Taiwan goes to the polls  tomorrow, 16 January, to select a new president. Pro-independence Democratic Progressive Party (DPP) chairwoman Tsai Ing-wen is the front runner to win the presidency. The DPP is expected to secure a majority in the legislative yuan, which raised concerns over cross-straits relations.


  • Iran’s international sanctions may be lifted over the weekend, which could mean that the additional 500,000 barrels of Iranian crude may enter the global oil markets thereafter, aggravating the supply glut.


  • Bank of Japan to release the Sakura Report on Monday, 18 January, which is the equivalent of the US Fed’s beige book.


  • The World Economic Forum in Davos will kick off on Wednesday, 20 January


  • A bunch of US data will be due, including housing data, CPI, and manufacturing activity.


*For more timely quips, you may wish to follow me on twitter at https://twitter.com/BernardAw_IG 

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