One week down, 51 to go. U.S. equity markets ushered in 2016 with their worst-ever five day start to a calendar year, eclipsing the 5.6% opening week of 1978. The equity market is now back into the same correction territory it explored in August of 2015 under similar concerns including Chinese fundamentals, oil patch collapse, Fed policy, and currency market implications. Shanghai fell 10%, Stoxx Europe lost 6.7%, and the S&P plunged 5.96%. The fall took U.S. small caps to within 0.7% of a technical bear market, down 19.3% from their June 2015 high. Safe haven assets including gold, Treasuries, U.S. dollars, and the Yen drew strong bids while crude oil continued its descent, closing the week at $33.16. Treasury yields fell sharply across the curve.
There are several core issues which risk markets are attempting to handicap including the commodity bear market, Chinese fundamentals, global currency fluctuations, and the Fed embarking on reducing monetary policy accommodation. As always, these drivers are invariably related but all represent some degree of natural adjustment as markets seek a more equilibrium state. Capital flight from China has reached neck break pace, estimated by JPMorgan at $930 billion between 2Q14 and 3Q15. This has forced the PBOC to defend (support) the yuan by deploying $108b of their foreign-exchange reserves in December alone. Meanwhile, the U.S. economy seems to be plodding along despite the strong U.S. dollar, expected rate hikes, and turmoil in the oil industry given the 70% fall in crude since 2014.
