Stock markets around the world have fallen sharply today, after nervous investors triggered a rout following a slide in oil prices and continued contractions in the Chinese economy. The panic was exacerbated by lingering market jitters over a weak start to the new year. The basic explanation is quite simple: oil, China, and fear.
WHAT HAPPENED?
Interestingly, news that longstanding sanctions on Iran were to be lifted triggered fears of oversupply in the already strained oil market. The Iranian government ordered an increase in oil production even in the midst of historically low prices, with supply readily outstripping demand. This caused the price of oil to fall, and investors withdrew money from the commodity.
IS THAT ALL?
The problem was exacerbated by recent upheavals in the Chinese market. Markets fell early in 2016 after Chinese output failed to match market expectations, leading to a record low start to the year. This magnified investor fears that the world’s second largest economy was set for a slowdown.
The Chinese government hasn’t helped matters much, with drastic shifts throughout 2015 in fiscal and market policy. Among the most controversial measure was the implementation of “circuit breakers” designed to temporarily stop trading if the market experienced a massive fluctuation. (The breakers were removed in early 2016 after being tripped twice in a single trading day.) The RMB has also been devalued in an attempt to gain acceptance in the worldwide market, in particular the Special Drawing Rights (a basket of stable currencies used as a “global benchmark”).
The measures, however, have effectively destabilized the RMB and by extension the Chinese economy. What we are seeing today is the inevitable result of the sweeping monetary policy changes triggered when China removed market controls. Finally, a lack of confidence in official Chinese government statistics increased jitters among investors hoping for a stable return.
But even with all of this, the Chinese market is not entirely to blame.
THE FEAR FACTOR
The slide has come on the heels of a jittery financial market, following gloomy predictions by analysts and a sudden slide early in the new year. 2016 predictions released by the major banks couldn’t have been more dire. Currency wars. Rampant mercantilism. No clear way to put money into safe havens. Markets in everything from China to commodities more bearish than mating season in the Arctic Circle. If analysts were having a contest to see who could make the most bankers jump off a ledge with a single report, RBS would be the winner. “The downside is crystallising,” the European Rates Research team of RBS wrote in its yearly outlook. “Watch out. Sell (mostly) everything.”
The question facing investors now is whether or not the markets were responding just as analysts predicted, or if it was a self-fulfilling prophecy triggered by bearish reports.
THE SILVER LINING?
It may not be all gloom and doom, however, and the effects of the slide may not reach beyond Wall Street. While the stock market is typically a bellwether for general economic health, it’s also given disproportionate weight because it’s one of the most visible, immediate, and quantifiable indicators. Reports on consumer spending, for instance, take time to go from cash register to profit posting. Just because the stock market is wobbly doesn’t mean a whole country is wobbly by extension. And this just could be Wall Street’s saving grace, an antidote to investor gloom.
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Updated 23 Jan 2016
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