Markets Stumble Badly

In Kenny’s Commentary, 12 Themes that will likely dominate 2016, sent out to email subscribers on New Year’s Eve, the first theme on the list was:

1.) Volatility will play a dominant role once again for investors as both an instrument of opportunity for the brave, but also a measure of risk aversion for the majority of investors. I expect a sharp spike higher (VIX) in Q1 as a result of equity market instability.

I outlined eleven other themes that I felt would dominate the equity trading terrain in 2016, number eight and twelve on the list were:

8.) China’s slowing economic performance will be closely watched with the path least of resistance still modestly lower (+6.4%).

12.) Geo-political and economic shocks and terrorism will continue to play the role of “Wild Card”. If recent history is any indication, that role will act to trigger heightened volatility and shake investor confidence.

I went on to tag the threat of Global Slowdown/China as the number one risk to our stock market for 2016 in the concluding thoughts. Number two on that list of risks was Geopolitical instability.

In many respects yesterday’s trading session was confirmation that the themes/risks I underscored for this year are in fact not only relevant but dominant. If my December 9th note, Stock markets loose their footing – look out below, rang true, it would be safe to state that markets stumbled yesterday. China’s continuing slowdown was underscored by the release of the Chinese Caixin PMI data for the month of December. The reading for December was 48.2 versus November’s 48.6. Though the tick lower was very modest, it confirms contraction and as a result widespread fear that China’s economic slowdown may yet pick up additional momentum. Additionally, tensions in the Middle East escalated dramatically over the weekend with the Saudi execution of 47 prisoners – including out spoken cleric Sheikh Nimr al-Nimr and 46 others convicted of terror charges. It was the largest mass execution of prisoners in Saudi Arabia since 1980. The Sheikh’s ties to regional power Iran and his criticism of the ruling Saudi family were seen as a threat to political stability within the nation state and broader Gulf region. Perversely, the regional instability born of the executions in Saudi Arabia and subsequent turmoil did actually provide a bid for crude in morning trading before it also succumbed to the broader narrative that is focused on global slowdown. As a result, the energy sector (-0.96%) did outperform the market on a dismal day.

US equity markets got clobbered yesterday. If you follow me on Twitter or LinkedIn (updated regularly), you would have known Sunday night that we were in for a major selloff yesterday as it was clear in the overnight that China’s sharp data induced rout would dominate the global equity trading landscape. Chinese equity markets lost nearly 7% before regulators closed markets for trading on Monday.


-Our selloff yesterday wiped $289 billion off the market cap of the S&P 500 Index.
-It was the sixth worst start to a year in 89 years.
-It was comprehensive as every major market sector of the S&P 500 and Dow Industrials shed meaningful ground.
-Internals were blindingly negative on both the NYSE and NASDAQ.
-All major equity indices closed sharply lower though the Dow and S&P 500 did manage to regain 1/3 on the day’s losses in the final hour of trading.
-Volatility as measure by the VIX jumped by 23.76% in less than two hours before closing with a gain of 2.49 points or 13.67% on the day.

US economic data on the day did little to bolster expectations for robust expansion. The PMI Manufacturing Index for the latest period came in at 51.2 versus consensus expectations that were calling for 52.8.The ISM Manufacturing Index was also weaker than expected at 48.2 versus 49.2. To top it all off, Construction Spending for the month reflected contraction. It came in at -0.4% versus consensus expectations of 0.3%. On a year-over-year basis Construction Spending expanded by 10.5%.

The Dow Industrials (-1.58%), S&P 500 (-1.51%) and NASDAQ (-2.09) all closed below both their 50 DMA and 200 DMA on a dramatic rise in volume. The NYSE volume (+55.12%) and the NASDAQ’s volume (+52.58%) both reflected overwhelming institutional investor conviction. Needless to say, yesterday was a distribution day. The steep losses on the day left the market in correction.

Today’s Economic Calendar is light on substance, as a result we remain tethered to the tone set by global markets and the price action of crude.

flickr photo: Cory M. Grenier