Market commentary: Asian markets rise, despite oil concerns and weak global growth

As global leaders gather in Davos for the annual World Economic Forum, markets across the globe are attempting to shrug off worries about weak global growth, plunging oil prices and capital market outflows from emerging markets which have dominated the headlines since the beginning of the year.

Despite these concerns Asian markets have managed to rise significantly on Tuesday. The Shanghai Composite Index gained 3.2% mainly on the back of not-so-bad-as-expected economic data from China. The Asian giant grew at a pace of 6.9% for 2015, in line with Beijing official growth target of “around 7%”. Other economic data, such as industrial production and retail sales for December also came in only slightly worse than expected, at 5.9% and 11.1% respectively.

Following in Asia’s footsteps, France’s CAC40 gained almost 2% and the UK FTSE closed almost 1.7% higher. The gains were mainly led by energy and miners. Renault has recalled more than 15,000 diesel cars after an admission that its emissions filtering system does not work in all temperatures.

The French carmaker denied any wrongdoing and said there was no ‘defeat device’ of the kind Volkswagen used to cheat emissions tests, but acknowledged there was a difference between its test results and actual pollution

The good news on Wall Street is that it hasn’t lost further ground since Friday. Stocks were unable to rally as the positive sentiment from Asian and European trading faded. Morgan Stanley was a noticeable mover, after returning to a profit of $908 million in 2015. Shares rose as much as 3.4% in pre-market trading as earnings and revenue beat expectations, only to settle at around 1.2% higher at market close.

What can we expect going forward? Judging from present correlations, the very near future might not be so bright. In sustained downward moves, like the one we are currently experiencing, asset prices tend to be highly correlated. Indeed, oil and stocks are exhibiting historically high levels of correlation, falling and rising in sync.

In this context, investors should not be too happy about the International Energy Agency’s latest monthly report, which says that “unless something changes, the oil market could drown in oversupply”.

The IEA states that Iran’s return to the market heralds a third consecutive year where supply will exceed demand for black gold by roughly 1 million barrels per day. With demand already on the back foot due to growth concerns and claims by Iran that it could step up production even more, even lower crude oil prices cannot be ruled out.

In the currency space, currencies such as the Australian and New Zealand dollars, the Chinese renminbi and the Korean won are being sold off in favour of the US dollar and also the Euro. In fact the single currency has recently tended to benefit even more in times of high market stress as carry trades traditionally funded in USD are now being funded in EUR thanks to the ECB’s ultra-loose monetary policy. Another sign that risk is currently off the table, if we ever needed one that is, is USD/JPY down by more than 3% since the beginning of the year.

The yen has rallied against the dollar despite diverging monetary policy expectations. Whilst the US is on course for further, if moderate, rate hikes this year, the debate in Japan is veering once again towards yet another round of accommodation.

Similarly, in rates, yields have fallen across the globe in developed economies in 2016. Slowing demand is stoking disinflationary fears or worse. Even in the UK, where inflation has hit an eleven month ‘high’ of 0.2% (!) 10-year Gilt yields have only risen by 4 basis points and are currently trading at around 1.70%.

Asian trading this morning swung back heavily into the red, and China’s GDP figures, while seemingly positive, are not so rosy. This year’s growth rate is the slowest in a quarter of a century, and marks a fifth successive decline in inflation-adjusted growth. As a main driver of world growth and the global economy, this is a major concern for investors.

Further unabated declines in growth could trigger a vicious circle of declining demand, prices and jobs. However, it is hard to imagine that the Chinese and, by extension, global authorities will remain on the sidelines. Indeed many analysts already expect further measures from most Asian governments to help support their economies.

Should investors keep heading for the exit or should they try to catch the proverbial falling knife? It would be too early to conclude that either strategy is warranted. Investors may need to turn away from strategies that worked in the past if they believe this is a cyclical shift rather than just a sharp correction. The ‘good’ news is that further declines at this point will not hurt as much.

This article was issued by Andrew Martinelli, Trader at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.