Sharp falls marked the first trading week of the new year, with China dragging global markets almost in similar fashion as in August 2015. Its stock markets halted two times in three days to arrest sharp falls. The first sell off came after its manufacturing Purchasing Managers’ Index (PMI) showed that activity contracted continuously for the past 10 months. Shares tanked more than 7 per cent prompting its newly installed circuit breakers to kick in. In order to calm the volatile market, People’s Bank of China (PBOC) injected 130 billion Yuan into the country’s financial system which helped the Chinese markets to stabilize for a day. But it could not be sustained for the succeeding day as PBOC sets its Yuan devaluation lower against the US dollar at the fastest pace triggering another global equities sell off. Chinese markets traded only for few minutes before its circuit breaker hit again after shares fell over 7 per cent. China’s Securities Regulatory Commission (CSRC) held an unscheduled meeting to access the market conditions and new circuit breakers, but failed to come to a decision on policy action.
China, meanwhile, suspended the recently installed circuit breaker. At the same time nuclear test conducted by North Korea heightened worry in Asian markets which were already in doldrums. Though the impact of geopolitical tensions on financial markets are short lived, the unique situations prevailing presently has ensured that risk appetite remained crippled, restricting price gains.
Though the present falls mirrored those in August, conditions have been dissimilar. The recovery from August lows were prompted by expectations of more rate cuts by the Reserve Bank of India, and lower expectations of a US Federal rate hike. In stark contrast, FOMC has hiked rates just a month back and is in line for more, while rate cut hopes from RBI has dimmed. Also the World Bank lowering its global economic growth outlook because of static performance from major emerging economies has also dampened investor sentiment.
The US FOMC minutes for the December meeting said that the “inflation was still running well below the Fed target and it would probably take some time to confirm that inflation was on a trajectory to return to 2 per cent over the medium term. This failed to enthuse markets as they were spooked by sharp fall in Chinese equities, and the pace with which China allowed Yuan to depreciate. Oil also continued to sink, putting further pressure on the US equities.
Meanwhile, Finance Minister Arun Jaitley’s assurance that reform measures would continue, soothed sentiments mid week, but were swept aside by the ripple effect of China events. India’s manufacturing PMI contracted for the first time since October 2013 to 49.10 in December from 50.30 in November 2015. Main economic data in focus next week would be IIP & CPI data on January 12, but the bigger event would be the third quarter results that would start pouring in from next week onwards. Also in focus would be budget related announcements and developments as FM hold parleys with Opposition as well as industry participants.
