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Indices Tumble – What Comes Next?

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2016: A difficult beginning for equity markets

Published: February 2016

Unlike early 2015 when equity markets increased sharply, 2016 begin in a very different way. Indeed, indices continued their tumble: the CAC40 lost up to 11% since early January, the DAX and EUROSTOXX50 -12%, the FTSE and MIB -15%, the SMI -9%, the DOW -11%, the S&P500 -12%, the Nasdaq 13%, the ASX -9%, the Nikkei -15%, the CSI300 -19%…

A difficult environment

Markets have shown considerable instability in early 2016 after reaching significant levels of volatility during the second half of 2015. China appears to catalyse many of the concerns: devaluation of the Yuan and the increased probability of a currency war, high volatility in Chinese equity markets despite government interventions (injection of liquidity, lower interest rates and bank reserve requirements, cancellation of the circuit-breaker after its first use, etc.), slowing Chinese growth (6.9%) with its transition focused on strengthening its domestic consumption.

Equity markets have particularly been hampered by weak growth in developed economies, the apparent slowdown in emerging economies and the collapse of commodity prices. Without taking in consideration the tense geopolitical situation between Saudi Arabia and Iran, the military nuclear tests in North Korea or the worldwide terrorist attacks.

Ultra-accommodative monetary policies of several central banks to stimulate growth and boost inflation do not appear very effective in achieving their goals. These lack of results are also beginning to weigh on the credibility of central banks to solve the situation.

Monetary policies (once again) to the rescue of the markets?

Monetary policy differences also appear between Europe and the United States where the Fed has increased rates in December 2015 for the first time since 2006 and will likely raise rates again in 2016 “at a gradual and measured pace”, depending on statistics (unemployment, wages, inflation) and the influence of business conditions in the world on the US economic outlook.

 

Mario Draghi announced on January 21th that interest rates would remain at current or lower levels for an extended period and that the monetary policy stance will be reconsidered in early March saying, “there are no limits to how far we are willing to deploy our instruments within our mandate to achieve our objective of a rate of inflation which is below but close to 2%”. After the speech, stock markets went up again, helped by the slight increase in oil prices.

Can investors project themselves beyond these current issues and postpone their attention to the fundamentals of each company on a case-by-case basis?

Carolane de Palmas

ActivTrades Analyst
Ms Corporate Finance & Financial Markets, AMF Certificated. After being part of the technical analysis company Highwave360, where she met many key international financial actors, Carolane became a ‘prop’ trader,…

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