The third week of 2016 has started in a calmer manner as major stock markets do not seem to be extending the heavy losses of the previous week. In addition, oil prices had deteriorated so rapidly that some sort of recovery was inevitable.
The negative trend since the start of the year needs a lot of progress to be reversed but investors will probably welcome any respite to the selling. Positive data has also helped today in view of the not-so-disastrous Chinese GDP numbers and the better-than-expected UK inflation and ZEW German sentiment survey.
It is also interesting to see the currencies that have been battered since the beginning of the year, have also rebounded – albeit from low levels. The Australian dollar for example, has managed to rebound sharply but has remained below the key psychological level of 70 cents. Similarly, the dollar has managed to recover some ground – particularly against the yen by reclaiming the 118 level. At the end of 2015, dollar / yen was north of 120. The pound also managed to regain some ground following slightly stronger-than-expected inflation figures. The euro from its part has been rangebound more or less, as data since the beginning of the year have showed that the Eurozone recovery is more or less on track. Extra stimulus from the ECB is not expected soon, allowing the euro to stand its ground.
The dollar is still favored by investors, but its allure could dim if the Fed decides it is going to pause its rate-hike campaign due to turbulence in financial markets and a possible slowdown in China. US data since the beginning of the year have been more mixed; with a stellar nonfarm payrolls number but weak retail sales. US inflation out on Wednesday will shed some more light on recent price trends.
Overall, it seems like risk on and risk off may become a key influence on markets once again, starting from developments in China. If Chinese authorities manage to contain the selling in their stock market and their currency, it could allow markets to stabilize. However, as the August –September 2015 market turmoil episode seems to have been repeated in the first few weeks for 2016, structural challenges of the world economy could lead to more such episodes later in the year.
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