October and November’s job numbers were greeted with scepticism. The Dow Jones has enjoyed a bull market since early 2009.
Investors, brace yourselves. If last week left you reeling, this week isn’t promising much better.
There’s no getting around it: China was at the heart of last week’s sharemarket destruction, and investors will approach this week with a high level of caution.
Futures are pointing to a 1.6 per cent fall to 4850 on the S&P/ASX 200 on Monday morning, a low not seen since July 2013.
What else has the week in store? Here are three things to keep an eye on. What China does next
It’s currently the most important time in global finance: when the People’s Bank of China sets the yuan reference rate at 12.15pm (AEDT), investors around the world will be holding their breath.
Last week’s global turmoil – from a hammering of Hangzhou stocks to oil’s slide to a 12-year low and an $85 billion wipe-out on the local market – was triggered by a seemingly small 1.5 per cent drop in China’s yuan over four days last week.
The market’s dramatic reaction brough back memories of last August, when Beijing’s 2 per cent devaluation of the yuan in the midst of an emerging market and commodity rout led to Wall Street’s biggest one-day drop in four years.
Both episodes show the depth of concern about the strength of the Chinese economy.
The moves by the PBoC have sparked fears that Beijing is lowering its currency to boost exports, but also that this in turn could lead to a round of competitive devaluations in emerging market, triggering a so-called currency war.
A raft of data in the coming weeks, starting with export and import figures on Wednesday, is likely to show activity in the world’s second-largest economy continuing to slow
“The depreciation of the renminbi is the key issue at present as its decline is helping fuel upwards pressure on the US dollar, adding to weakness in oil and other commodity prices and keeping alive fears of some sort of emerging market crisis,” Dr Oliver said.
“Fortunately, Friday did see some stability return to the Chinese share market and currency but it needs to be sustained.”
It also sent the n dollar down more than 3 per cent last week and back below the US70¢ mark, pleasing pundits, including Clime Asset Management’s John Abernethy, who says the currency needs to be in the mid US60¢ range to boost the economy.
The wild rollercoaster on Chinese sharemarkets didn’t help investor confidence. Newly introduced ‘circuit breakers’ that shut down all trade for the day when the market slides more than 7 per cent backfired, forcing regulators to scrap them, which in turn raised doubts about Beijing’s grasp on financial markets. About those employment figures
The 58,600 new jobs in the month of October was greeted by astonishment and more than a little scepticism, and 71,400 new jobs in November was greeted with high levels of scepticism and more than a little mirth, given 15,000 is generally considered a normal boost in a healthy jobs market.
The scene is set for a dramatic reveal on Thursday when the n bureau of statistics delivers its figures for December.
Consensus estimates on Bloomberg anticipate a drop of 10,000.
But tipping the number isn’t easy, AMP Capital chief economist Shane Oliver says.
“The reality is that trying to pick the jobs numbers is a bit like forecasting a random number generator,” he says.
It’s not the only jobs data smashing expectations, on Friday the US added 292,000 jobs, much higher than the anticipated 200,000. But the number was largely overlooked as investors fixed their eyes on China’s wild sharemarket gyrations. Wall Street bull heading for the exit?
The Dow Jones Industrial Average is enjoying a six-year bull run, begun with the introduction of monetary stimulus after the global financial crisis in early 2009.
But Katana Asset Management portfolio manager Romano Sala Tenna expects this is at an end, saying on a daily, weekly and monthly technical basis, the index has “rolled over”, signalling the end of the bull market.
“It has broken its uptrend, its on a sideways momentum, the next stage is a downtrend from here,” he says.
The bad news for n investors is that while the market didn’t follow the Dow up on its 70 per cent ride skywards, historically it tends to follow it on the way down, Mr Sala Tenna says.
It is impossible to know when that will happen, but December quarterly earnings might provide some enlightenment. The consensus is for earnings to fall 6 per cent year on year, but Dr Oliver said there is potential for an upside surprise given the gloomy expectations.