Chinese Growth Concerns and Tensions in Middle East Spark Global Stock Sell Off

Financial markets kicked off 2016 in turmoil after disappointing manufacturing data out of China raised concern over the strength of the global economy.  The latest Caixin-Markit manufacturing report showed a decline to 48.2 in December, below the previous reading of 48.6, and missing expectations for an increase to 48.9.  This is the 10th consecutive month that the index has remained below the expansion threshold of 50.  The Caixin report was consistent with the weak NBS manufacturing PMI report which was released by the Chinese government on New Year’s Day.  The combination of weak manufacturing data, a drop in the yuan, and speculation that a ban of share sales by major stakeholders will be lifted at the end of the week sparked a massive drop in Chinese equities.  The benchmark Shanghai index fell 7%, triggering a new circuit breaker that prompted a halt in trading.  US and European stock indexes fell in sympathy while Treasuries rallied 2-5 bps across the curve.

Tensions in the Middle East also contributed to the bearish sentiment for risk assets.  Yesterday Saudi Arabia announced it will cut all diplomatic ties with Iran after Iranian protesters attacked the Saudi embassy in Tehran following the Saudi’s execution of a prominent Shiite cleric.  The conflict has the potential to spread across the Middle East after several Saudi allies including Bahrain, Sudan, and the UAE either severed or downgraded diplomatic relations with Tehran. This helped gold prices move up 1% today, while the dollar softened against the Euro and the yen.

In the US, the ISM manufacturing headline index disappointed, remaining in contractionary territory with a 0.4 decline to 48.2 in December.  The index’s headline decline was almost solely driven by a 0.64 point decline of the employment sub index.  It isn’t a big surprise that manufacturing jobs are down given the headwinds facing the sector.  Other highlights this week include the December nonfarm payrolls report and the release of December’s FOMC minutes.