Holidays a Distant Memory for Traders Reeling Amid 2016 Rout

Why the Wild Stock Swings in European Stocks?
  • Risky assets see flight as China adds to global anxieties
  • Some volatility measures start year with record increases

So much for easing into 2016.

At AMP Capital Investors in Sydney, Nader Naeimi’s diary is filling with meetings and his inbox is clogged with recommendations to sell equities. Instead of relaxing in a post-holiday lull, Hans Goetti at Banque Internationale a Luxembourg SA in Dubai is trying to assess whether China’s sinking currency will unleash capital outflows that the economy can’t sustain. In Denmark, Saxo Bank A/S’s Peter Garnry is dealing with non-stop phone calls from clients.

A flight from risky assets has defined the first days of the new year, with volatility surging on concern about turmoil in China and escalating tension in the Middle East. Even as the MSCI All-Country World Index’s bull market extends to more than 1,500 days, investors are facing a difficult start to 2016 after losing money on global stocks, high-yield bonds and commodities in 2015.

“It’s like the holiday never happened,” said Naeimi, a fund manager at AMP Capital, which oversees about $110 billion. “Everyone is chasing shadows. What’s adding to the nervousness is that we’ve been in this extended bull market since 2009 -- we’ve had really, really strong gains. Everyone’s nervous.”

Global Risk

Investors returned Monday to a 7 percent rout in Chinese equities and the news that Saudi Arabia had expelled Iran’s diplomats in a dispute about the execution of a Shiite cleric. China’s policy makers were in focus Tuesday, with stocks seesawing as they added cash to the financial system, intervened to buy equities and postponed the end of a ban on major shareholders selling stakes. On Wednesday, the People’s Bank of China cut its yuan fixing to the lowest since April 2011, reigniting concern about the outlook for the world’s second-biggest economy, and North Korea conducted its first nuclear test since 2013.

The MSCI gauge of global equities fell 1.1 percent at 11:14 a.m. in New York, extending its lowest level in three months. It’s lost 3.2 percent so far in 2016.

“Clients have been panicking, calling us to try to make sense of it all,” said Garnry, head of equity strategy at Saxo Bank in Hellerup, Denmark. “But how do you interpret this market? It makes little sense. We were obviously surprised and not prepared for such a bad start to 2016.”

Stocks have shown resilience for years, bouncing back after the Ukraine crisis, Greece’s debt woes and the collapse in oil prices. But concern over China’s economy and the repercussions for global markets have kept surfacing, weighing on equities throughout 2015. The nation’s shock currency devaluation roiled markets in August, and the steady slide that’s now under way is a sign that policy makers are becoming more tolerant of depreciation as intervention costs rise and economic growth slows.

Volatility Rules

The storm of selling that greeted equity investors returning from their holiday break saw a U.S. volatility measure post its biggest first-day jump in history. The Stoxx Europe 600 Index had the biggest-ever drop to start to a year, while investors in Asia suffered their worst first day since 1988. Global equities erased more than $1.9 trillion on Monday.

“The Chinese currency is a bit worrying,” said Goetti, Dubai-based head of investment for Asia at Banque Internationale a Luxembourg, which has $35 billion in assets. “This could lead to further capital outflows and that could be a problem. If this gets to a proportion that’s uncontrollable, this could be a black swan event.”

Volatility was a feature of 2015 too, with the number of days in which the Standard & Poor’s 500 Index rose or fell 1 percent or more almost doubling from 2014. Global equities snapped a three-year rally as a slowdown in the Chinese economy fueled the biggest retreat in raw materials prices since 2008 just as the Federal Reserve ended its zero interest-rate policy.

Forecasting Rallies

Market watchers entered the new year with optimism. In the U.S., 14 strategists surveyed by Bloomberg in mid-December predicted the S&P 500 will climb more than 8 percent this year. Forecasters in Europe were looking for a 13 percent jump in the Stoxx 600, while Japan’s Topix index was seen advancing 16 percent.

Kiyoshi Ishigane, Tokyo-based chief strategist at Mitsubishi UFJ Kokusai Asset Management Co., says he was wary coming to 2016 and while he still expects modest gains, he’s getting less optimistic that equities can reach new peaks. The Topix index is 12 percent below its eight-year high reached in August.

“This year, it’ll be difficult to be completely risk on,” he said. “Developed-market shares are preferable.”

Benno Galliker, a trader at Luzerner Kantonalbank AG, is going for the safest bets.

“It’s really been a bloodbath,” Galliker said from Lucerne, Switzerland. “Most are really reluctant to go into this market. This is the theme at the moment: hide in the most stable and boring stock you find. And in Switzerland, we have some of those.”

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