Two key factors are at play: 1) the plunge in oil prices, which are at their lowest level since 2005; this decline is primarily associated with excessive supply (a “price war” between producers, with OPEC attempting to maintain its market share, and tensions between Saudi Arabia and Iran); 2) the concerns over the Chinese market. The lifting of a ban on selling certain securities, which has been in place since August 2015, meant that authorities were forced to suspend trading after two 7% drops in the market in the space of a week. These circuit breakers which followed excessive price fluctuations turned out to be counterproductive and were therefore suspended by the Chinese authorities on the evening of 7 January.
The situation in China is concerning for the markets insofar as fears of the country’s ability to control its economic slowdown and its currency are lurking behind the technical aspects. In 2011 it was the risk in the eurozone that was instilling fear in markets; now it is China’s turn to provide some reassurance. The period of tension on the markets could therefore continue a little while longer. It is important that the yuan and oil both stabilise.
However, we should not lose sight of certain points:
- If the situation deteriorates further, China will have no other choice than to enhance its monetary easing and/or budgetary stimulus measures.
- Insofar as the drop in oil prices is primarily a supply-side shock, it will underpin consumption in the advanced economies.
- An oil countershock during an election year in the US is likely to act as a supporting factor for the US economy and the equity markets.
- Against a deflationary global backdrop, the central banks are retaining some room to manoeuvre. If necessary, the Fed could reverse its monetary policy, while the ECB and the BoJ can step up their securities purchase programmes. The Chinese central bank also has plenty of wiggle room in this regard.
In conclusion, the resilience of the developed economies and the monetary and budgetary authorities’ capacity to react in the event of a deterioration in the economy leads us to maintain our constructive opinion on equities, particularly in the eurozone, for 2016, while reiterating the importance of also being positioned on macro-hedge assets this year, such as US government bonds and the yen.