Stocks fall in the first trading day of the new year after a renewed selloff in China’s markets. The S&P500 lost 1.5% to 2,012 while the Dow Jones fell 1.6% to 17,148. There was risk off sentiment across markets today as equities fell, the VIX rose above 20, and haven assets such as core bonds, gold, and the yen all rose. In China stocks fell 7% which triggered a new rule put in place after this summer to halt all trading in the country after losses reach the 7% threshold. Contributing to the selloff was concerns of further manufacturing contraction. The industrial metals market shows the extent of the concerns and the subsequent impact on financial markets. Copper fell 2.1%, zinc fell 2.6%, and Nickel lost 3.5%. In addition, the PBoC lowered the renminbi against the dollar for the fifth straight day to the weakest level since 2011. The US 10 year yield fell 4 basis points to 2.23% and the German bund yield fell 7 basis points to 0.56%. The Japanese yen rose 0.7% against the dollar to Y119.47. Also contributing to risk aversion was the increasing tension between Saudi Arabia and Iran. As a result of these tensions oil prices rose briefly but this was offset by China’s data.
This past summer the Chinese government imposed restrictions on large shareholders in order to prevent large stock sales, and later this week those bans are set to expire. This is another factor that could have contributed to downward pressure today. Data showed that a private manufacturing index showed the 10th consecutive month of contraction for the sector. Economists are expecting a growth target of 6.5% this upcoming year, and data later this onto will show whether or not the country hit its 2015 target of 7% GDP growth. The Renminbi daily fix was set at 6.5032 against the dollar, which is notably weak. Today was the first day that circuit breakers were put in place to shut down trading for the day after losses of 7%, and the new technology was used on its first day. Some analysts say that this limit intensifies selling pressure as more investors will rush for the exits sooner and into haven assets.
The dispute between Saudi Arabia and Iran increases geopolitical risk in markets, particularly in oil as both countries are large producers and members of Opec. The tension between the two countries comes afar Saudi Arabia executed a cleric against the wishes of Iran. This puts upward pressure on oil prices, however today this momentum was offset by China’s developments. The state of current relations between the countries decreases the chances that Opec reaches an agreement about what to do with its oil production levels. WTI initially rose 3.6% to $38.39 before retreating to finish mostly flat on the day.
The Brazilian real falls against the US dollar to start the new year, depreciating to a low of R$4.06. This is largely due to China’s manufacturing data, which has a negative effect on Brazil’s economic prospects since Brazil is a close trade partner with China. The real lost 30% against the dollar in 2015 and is poised for future losses heading into 2016. Over the past several months Brazil’s credit has been cut to junk by S&P and Fitch. The rating is currently under review by Moody’s, and a decision is expected within the next few days. According to some analysts a credit downgrade from Moody’s is already priced in to the exchange rate.