It’s been quite a start to the year – but certainly not the one investors were hoping for. Not only have Chinese stocks fallen by over seven per cent as of Monday, January 4, North American markets had one of the worst kickoffs in three decades. Results were so bad, trading has been halted twice this week in China to limit the damage. What’s happening in Chinese and North American markets – and what action should you take as an investor?
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Chinese Markets: Leading Global Uncertainty
The Shanghai Composite Index, China’s equivalent of the Dow Jones, started the first trading day of the year down 6.9 per cent, marking its lowest level in almost three months. Investor concerns over lacklustre manufacturing data released over the weekend prompted the mass selloff.
China’s market also passed a major milestone on Monday – unfortunately, not a good one. The market fell enough to result in emergency trading suspension. This lead to the switch being flipped on the “circuit breaker,” causing trading to halt for the rest of the day. This is the first time China has used the circuit breaker since it was introduced last year. Stock markets around the world, including in New York and Toronto, have similar circuit breakers to limit the damage in a market freefall; a 7 per cent decline would cause the markets to shut down for 15 minutes, while a plunge of 20 per cent would cause markets to be shut down for the remainder of the day.
There has been a lot of concern surrounding China since the summer of 2015, when speculation arose that a stock sell-off could occur after markets fell by over 25 per cent within the span of weeks.
The world’s second largest economy faltering certainly isn’t the news investors are looking for at a time of economic uncertainty. Although we’re far from a financial crisis, a slowdown in China is bad news overall for the world economy. China has gone from consistently delivering double-digit growth to slowing a lot in recent years. It remains to be seen if it can regain any of its momentum.
North America Markets: In Oil’s Shadow
The slowdown in China is having a spillover effect in Canada and the U.S, pushing the Dow Jones down by 3 per cent. In fact, every single one of its constituents was lower – yikes!
Aside from shaky markets, Canada continues to be hit hard by falling oil prices. The loonie has been on a downward trajectory since the price of oil fell below $100 a barrel a year and a half ago. Our dollar is often referred to as the “petro dollar” for its close relationship to the price of oil.
Now, new tensions in the Middle East are further lowering oil prices; Saudi Arabia has cut diplomatic ties with Iran. With these two countries being two major suppliers of oil, this has the potential to threaten the world’s oil supply, and could lead to more instability for prices here.
The American Angle
It’s also unclear how recent rate rises in the U.S. will impact Canada’s economy – as poor performance here leads to speculation of another rate cut (a likelihood of 50 per cent, say economists), the two countries’ monetary policies are no longer aligned.
The U.S. is also in the throes of a presidential election in 2016, which casts a shadow of uncertainty over the U.S. economy. From Hilary Clinton to Donald Trump, the presidential candidates have touted different strategies for tackling the economy, so it’s hard to predict what America has in store in terms of future action.
The bottom line: it’s going to be a bumpy ride for investors over the next few months.