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China Still Matters
Worries about China’s growth slammed markets this week, pushing them off a cliff to start the new year. For the week, the broader U.S. averages ended down more than 5%, while the tech-heavy Nasdaq shed more than 6.5%.
The biggest cause of anxiety for global equities was renewed concerns about how much China’s growth will slow. Fresh data on both the manufacturing and services sectors of the nation’s economy didn’t give investors much hope to cling to at the start of the week, and forced investors to rush for the exit doors.
All in all, China’s Shanghai Composite index wiped off 10% in market value over the last five days, and saw two sessions in which trading was halted for volatility after tripping newly installed circuit breakers, designed to prevent panic selling.
The problem: The circuit breakers were set to suspend activity when stocks dropped 7%. Compare that to a 20% threshold in the U.S., and investors quickly realized they didn’t have far to drop before they couldn’t execute orders. That only amplified the effect of worries over China’s currency devaluations, and the impact to emerging markets as a whole.
Oil Prices Nosedive
Oil prices, which have come under intense pressure for the last year-and-a-half thanks to a global glut of supply, continued to decline this week, at one point hitting a 12-year low.
The biggest worry: The growing oversupply won’t ease any time soon. Last year, the Organization for Petroleum Exporting Countries (OPEC) continued to bring its only supply onto the market at the same rate it had been in the year prior, opting not to cut production and hoping the excess supply would squeeze out competition from shale producers.
What also added to increased anxiety this week were mounting tensions between Saudi Arabia and Iran, weak oil-demand figures from China and developments out of North Korea. The nation, on Tuesday night, said it tested a hydrogen bomb.
George Schutlze, founder of Schultze Asset Management, said the pressure on oil and gas companies is changing the paradigm for the industry and expects to see a lot of consolidation on the road ahead.
“It just makes sense for companies struggling with this new market paradigm to try and save money somehow,” he said. “However, it’s not clear that’s going to work so well.”
To that point, Saudi Arabia said it was considering taking Aramco, its state-owned oil and gas company, which produces 10% of the world’s global oil supply every day, public.
“Previously, that would be totally unheard of: For the kingdom to bring their entity public, but today’s market prices are really forcing those kinds of moves,” Schultze said.
He illustrated the point of the struggle for single-producers by saying if all U.S. producers combined into one, that one company still wouldn’t have pricing power to raise global prices.
“It’s not that unusual, when an industry becomes distressed, that many of the players either go bankrupt, or try to combine along the way. And I think we’re in the early stages of that in the U.S. E&P industry,” he said.
December to Remember
Call it a December to remember: Wall Street cheered a much better-than-expected jobs report, which showed the U.S. economy added 292,000 in the final month of 2015, compared to expectations for a gain of 200,000 jobs. The unemployment rate held steady at 5%, while the labor force participation rate ticked up to 62.6% from 62.5%.
Still, despite the blowout headline numbers, wage growth was stagnant for the month. Average hourly earnings for all private workers were unchanged during December.
Additionally, the economy saw an unexpected increase in factory jobs in the U.S.: an additional 8,000, compared to expectations for a loss of 1,000 jobs for the month. Those numbers come during a time when the U.S. manufacturing sector remains rooted in contraction territory.
While it’s just one data point, and not indicative of a trend, Schultze said it’s an interesting nuance.
“There’s been a big reduction in overall manufacturing jobs, tremendously, for the last couple of decades. So it’s not really that big of a movement, but there might also be some seasonality,” he said.
Excitement from the overall jobs report failed to keep Wall Street positive, though, after a more than 200-point rally on the Dow immediately following the data’s release. The markets capped the week solidly in negative territory.
What to Watch Next Week
Next week begins quietly with no significant pieces of data out until Thursday with the release of weekly jobless claims and import/export prices. Friday, however, brings a busy day of data with retail sales, consumer sentiment, producer prices, and Empire State manufacturing.
The Federal Reserve’s anecdotal Beige Book report, a culmination of economic conditions across the central bank’s 12 districts, is also set for release next week on Wednesday.
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