Global Markets

A second week of volatile trading battered investors as they sought safe havens. Equities and oil prices tumbled with increasing velocity as investors fretted about global growth. Crude broke through the $30 resistance level. Increasingly, traders focused on China and its gyrating stock market and aped its moves elsewhere. On the week, equity indexes retreated with many falling into bear market territory. Scant attention was paid to new economic data except when in emanated from China. Analysts have noted that January so far carried signs of August when global equity markets were transfixed by weaker data from China and the uneasy response of Beijing authorities.

The drop in crude, fears that China is relinquishing its role as an engine of global growth and uncertainty over how aggressively the Federal Reserve will add to its December rate rise are proving dominant concerns for investors, overshadowing fresh evidence of strength in the U.S. labour market and some signs of economic improvement in Europe.

Global Stock Market Recap

Europe and the UK

Equities retreated last week thanks to the same factors that drove stocks lower elsewhere around the globe. The declines grew in magnitude as the week progressed. The FTSE is about 20 percent below a record high reached last April and down 7 percent since the start of 2016, and it was 1.8 percent lower on the week. The SMI matched the FTSE's decline. The CAC and DAX tumbled 2.9 percent and 3.1 percent respectively. There was little in the way of positive economic data to distract investors from their focus on China and commodities.

Plummeting oil prices and another sharp sell-off in China have sapped investors' appetite for risk. Both West Texas intermediate and Brent crude oil prices dropped below $30 per barrel amid speculation Iranian oil will exacerbate the global supply glut. Friday's selloff, the biggest of the week, was broad based. Falling oil prices led to a pullback in energy stocks, while concerns about China led to a negative impact on mining and resource shares along with oil and metals prices.

Bank of England

As widely anticipated, the Bank of England's monetary policy committee announced that it was leaving the Bank Rate at 0.5 percent and its asset purchase ceiling at Stg375 billion. Maintaining the stock at Stg375 billion will entail re-investing Stg8.4 billion of cash flows associated with maturing investments.

Outside of a still robust housing market, pressure for a tightening has eased somewhat since the MPC's December deliberations. The services economy seems to be holding up well but manufacturing looks to have all but stagnated. Retail sales were buoyant in November but solid 'Black Friday' purchases may well have been at the expense of December and, significantly, demand continues to be supported by heavy discounting. In addition to stubbornly weak inflation (0.1 percent annual rate in November), wage growth has decelerated surprisingly sharply. As the minutes underline, developments here remain critical to any policy move.

The minutes show that the MPC has become more cautious about the economic outlook and has downgraded its November projections for both growth and inflation. Consequently, with tumbling oil prices set to depress the CPI further at the start of 2016, increasing concerns about a slowing global economy and heightened stock market volatility, there is little for the MPC hawks to get their talons into. That said, at least a slightly weaker pound has provided a little more room to raise rates. Even then, the BoE would be loath to risk reversing the currency's recent slide by making sterling assets more attractive.

European Central Bank minutes

The summarized accounts of the ECB's December policy meeting show that the decision to reduce the deposit rate by 10 basis points to minus 0.30 percent and to extend the QE program through at least March 2017 was a far from straightforward affair. For a start, some members wanted a 20 basis point cut (which would have really pleased financial markets and hit the euro) but the majority view was that a smaller move now would leave room for another reduction in the future. There were also discussions about extending the Asset Purchase Program (APP) by more than the six months ultimately agreed upon and even front-end loading the purchases beyond what might be required by seasonal market factors.

However, some members (Germany almost certainly) saw no need to adjust policy at all and wanted to allow longer for previously adopted measures to take effect. As a result, the final decision was a compromise. The so-called policy recalibration reflected the majority view that, in the absence of fresh measures, inflation was unlikely to meet its near-2 percent medium-term target. The impact of the Chinese slowdown did not seem to have a major impact on the decision but, not surprisingly, economic risks were generally seen on the downside.

Asia Pacific

Equities tumbled for a second week as troubles in China's markets infected regional markets sending stocks and commodities lower for the week. Losses ranged from 0.5 percent (Jakarta Composite) to 9.0 percent (Shanghai Composite). Only the SET managed an increase of 0.1 percent. Most indexes were down four of five days, rallying only at mid-week. Key to falling equities was the relentless downward trend for crude prices. The Nikkei lost 3.1 percent thanks to lower oil prices and a higher value of the yen against the U.S. dollar. On Friday, Bank of Japan Governor Haruhiko Kuroda said he is not considering additional easing at the moment, blaming tumbling global oil prices for Japan's sluggish price trend. Adding to traders' concerns was the U.S. Federal Reserve's Beige Book that indicated that growth remained moderate.

The Shanghai Composite's volatility continued throughout this week. It ended the week on a sour note after the release of mixed lending and foreign direct investment data. While foreign direct investment into China accelerated in 2015 driven by strong expansion in investment into the service sector, data showed demand for bank loans remains weak. Chinese banks continue to be wary of boosting lending to businesses. New yuan loans extended by Chinese banks dropped to 597.8 billion yuan ($90.76 billion) in December from 708.9 billion in November, adding to the gloom surrounding the country's economy. The week's losses sent the Shanghai Composite into a bear market Friday following a deep afternoon selloff that dragged markets in the rest of the region lower as well.

As China's legions of retail investors flee the country's tumultuous equity markets, money is flowing into perceived safe haven assets such as domestic bonds, gold and the dollar. Unlike Western markets where institutional investors dominate, individuals account for 80 percent of transactions on Chinese exchanges. Nearly 100 million people have trading accounts. Their enthusiasm for stocks drove China's main indexes to record highs in the first half of 2015. But after enduring a summer that saw prices plunge around 40 percent, the January sell-off has been the final straw for many. Alongside the renewed slide in stocks, ordinary Chinese investors have been shaken by last week's acceleration in the decline of the yuan. This has also fueled demand for gold.

China posted its December merchandise trade balance. In yuan terms, exports from a year ago were up a surprising 2.3 percent while in U.S. dollar terms exports continued to decline, this time by 1.4 percent. Either way, the readings were better than expected although the positive yuan number was most quoted. Earlier in the week, Chinese shares plunged further on economic concerns after data released over the weekend showed producer prices fell for a 46th month. China's consumer price inflation remained muted at about half the government's target for 2015 in December and the producer price index remained deep into deflationary territory, stirring concerns over a slowing economy.

Currencies

The U.S. dollar was buffeted all week along with commodities and securities in volatile trading. The currency advanced against the euro, pound sterling, Swiss franc and the commodity currencies, the Canadian and Australian dollars. However, it retreated against the yen. The yen advanced thanks to its safe haven status — but to the dismay of the Bank of Japan.

Much of the discussion this week centered on the People's Bank of China's fix for the onshore yuan. The PBoC sets a daily rate for the onshore yuan. The currency steadied in recent days after weakening sharply last week. However, the yuan declined against the dollar for the week. China's foreign reserves fell by 13 percent in 2015 to $3.33 trillion, the lowest level in three years, as the People's Bank of China spent dollars to offset declines in the yuan. Analysts consider the steep decline in reserves an indication of increasing capital outflows from China. Last week, faster than expected depreciation of the yuan sparked losses in China that spread to other markets. Stocks in Shanghai tumbled amid fears that Chinese authorities are unable to stem recent turmoil in their financial markets.

An unknown is the scale of PBoC intervention in the offshore market, where the currency trades freely. Traders say the offshore yuan has been strengthening as state-owned Chinese banks buy the currency — a sign the PBoC is intervening to narrow the gap between onshore and offshore rates. That has limited the supply of the offshore yuan, tightening liquidity and sending the rate at which Hong Kong banks lend yuan to each other overnight to a record high of 66.8 percent on Tuesday. Higher borrowing costs make bets against the yuan expensive.

Selected currencies — weekly results

Commodities

Brent crude futures plunged more than 4 percent to fresh 12-year lows Friday as the market braced for increased Iranian oil exports. The lifting of international sanctions is possible within days. Brent and U.S. crude oil were on track to close lower for a third consecutive week, down roughly 20 percent from their 2016 highs. The International Atomic Energy Agency (IAEA) could issue its report on Iran's compliance with an agreement to curb its nuclear program during a Friday meeting in Vienna, potentially triggering the lifting of Western sanctions.

Some analysts are more concerned about the impact of new exports from Iran. While experts warned that not all sanctions may be lifted immediately once the agreement on its nuclear program comes into effect, any additional oil would add to a glut that has pushed prices into a deep slump since mid-2014. Oil prices dove below $30 a barrel on Friday, dragging major equity indexes around the world sharply lower, as fears of a global slowdown amid a crude supply glut roiled markets and unsettled investors who snapped up gold and other safe haven assets.

Indicator scoreboard

United Kingdom

November industrial production dropped 0.7 percent but was up 1.0 percent on the year. At the same time, the key manufacturing area saw a 0.4 percent contraction from October when it also fell 0.4 percent. Annual growth here dropped to minus 1.2 percent from minus 0.2 percent. The monthly drop in manufacturing output reflected declines in 10 of the 13 subsectors among which a near-5 percent slump in pharmaceuticals did most of the damage. The main boost came from other manufacturing & repair where output was up 5.0 percent, thanks to a 28.1 percent spike in aircraft & spacecraft repair & maintenance. Within total industrial production, mining & quarrying recorded a 1.6 percent monthly decline and this was compounded by a 2.1 percent decrease in electricity, gas, steam & air conditioning and a 0.5 percent slide in water & waste management.

Asia/Pacific

Japan

December producer prices dropped 3.4 percent from a year ago for the ninth straight decline. Costs for chemicals and fuels marked smaller annual drops while the prices for iron and steel and nonferrous metals posted larger declines. In 2015, producer prices fell 2.2 percent, the first drop in three years after rising 3.1 percent in 2014. On the month, the producer price index dipped 0.3 percent for the seventh straight drop after slipping 0.1 percent in November. Lower prices for fuels and nonferrous metals offset higher prices for farm products.

November core machine orders plunged 14.4 percent after soaring 10.7 percent the month before. On the year, core orders were down 2.3 percent after increasing 14.2 percent. These data, though very volatile, are a popular proxy for capital expenditures. The total value of machinery orders received by 280 manufacturers dropped 23.2 percent after increasing 20.9 percent from the previous month on a seasonally adjusted basis. Private sector core nonmanufacturing orders dropped 18.0 percent.

Australia

December unemployment rate was 5.8 percent down from an upwardly revised rate of 5.9 percent in November. At the same time, employment declined 1,000 rather than the 10,000 expected. The number of new jobs added in November was revised upward to 74,900 from 71,400. This report is subject to multiple revisions which over the past year have usually gone well beyond expectations. The participation rate in December was 65.1 percent, compared to 65.3 percent in November.

China

December consumer price index was up 1.6 percent from a year ago. On the month, the CPI was 0.5 percent higher. For 2015, the CPI was 1.4 percent higher after increasing 2.0 percent in 20`4. The urban CPI was up 1.7 percent while the rural was up 1.5 percent. Food prices jumped 2.7 percent on the year after increasing 2.3 percent in November. Nonfood CPI was up 1.1 percent for a second month.

December producer price index dropped 5.9 percent for the fifth consecutive month. On the month the index was down 0.6 percent after declining 0.5 percent in November. For 2015, the PPI was down 5.2 percent compared with a decline of 1.9 percent in 2014. On the year, consumer goods were down 0.4 percent. Raw materials procurement, fuel and power dropped 6.8 percent after declining 6.9 percent the month before. Production materials were down 7.6 percent for a third month.

In U.S. dollar terms, the December trade surplus was $594.5 billion. Exports were down 1.4 percent on the year while imports dropped 7.6 percent. For the year 2015, the trade surplus was $594.5 billion, up from $392.46 billion in 2014. On a seasonally adjusted basis, December exports were up 4.5 percent and imports were 5.4 percent higher. Seasonally adjusted exports and imports were down 2.8 percent and 7.6 percent respectively from a year ago. In December, exports to the U.S. dropped 3.7 percent on the year while imports eased 0.8 percent. This was an improvement from November when exports sank 5.3 percent and imports dropped 6.4 percent. In contrast, exports to the European Union were up 1.7 percent after sinking 9.0 percent in November. Imports however, plunged 15.5 percent after sinking 9.1 percent the month before. Imports from the EU were down every month in 2015. Exports and imports with Japan were down 4.6 percent and 9.6 percent respectively after dropping 10.5 percent and 10.3 percent in November.

In Renminbi terms, the December merchandise trade surplus was Rmb382.1 billion, far higher than forecasts, though below a recent peak in October. Chinese exports climbed for the first time since June, outpacing forecasts with figures that are likely to spark talk about how a weaker currency may be aiding the economy. In yuan terms, exports were up 2.3 percent on the year while imports tumbled only 4.0 percent. The 4.0 percent decline in imports is the smallest contraction of 2015.

Bottom line

Markets gyrated for a second week as investors ignored positive economic data and focused on news emanating from China. The Bank of England once again maintained the status quo while the European Central Bank explained its December policy moves. Data from Japan was dismal with its producer price index remaining in negative territory and volatile machine orders plunging once again. China's CPI was weak while the PPI continued to plumb negative territory.

The third week of the year will bring more focus on China when December retail sales and industrial production will be released along with fourth quarter gross domestic product. The European Central Bank announces its policy decision as does the Bank of Canada. A look into January's manufacturing sector will be available with the flash PMIs for Japan, Eurozone, France, Germany and the U.S.

Looking Ahead: January 18 through January 22, 2016

Anne D Picker is the author of International Economic Indicators and Central Banks.