By Anthony Jerdine | Updated February 05, 2016
The global markets have had a rough start in 2016. A drop of around 20% for the SSE Composite, the Chinese stock market, has boiled over into other markets. The S&P 500 is down close to 9%. The price for crude oil crashed further in January, falling over 20% during the first few trading weeks. The markets are clearly on edge due to high volatility. Many are wondering if the poor start to the year is a possible sign of a coming recession in 2016. Some financial luminaries such as George Soros and Bill Gross are predicting further declines in the global markets.
Volatility in the SSE Composite in early 2016 is impacting other global markets. This market was one of the contributing factors to the large break in the global markets during August and September 2015. The Chinese government has encouraged retail investing in the stock market since 2010. As the market rallied prior to 2015, Chinese investors used margin amounts to increase the leverage of their portfolios. As the market came under pressure, investors went on margin calls for their positions. This led to a vicious cycle of panic selling.
The fear and volatility have continued into 2016. A new circuit breaker that stopped trading automatically when it hit a 7% decline came into effect for the start of 2016. The market price triggered the breaker on the first two trading days of the year. This breaker was then abandoned since it did not work very well.
In addition, economic growth in China is not as robust as previously predicted. The country only saw growth of 6.9% in 2015, the lowest amount in 25 years. Since China consumes a great deal of raw commodities and supplies such as steel, copper and coal, this slowdown in growth is dragging on the markets. China is also allowing its currency to float freely for the first time after having kept it pegged. This is another global destabilizing factor.
Crude Oil Drop
Wide price swings in the global markets appear to be highly correlated with the price of crude oil. As the price of crude has fallen, the global markets have followed suit. Oil started 2016 at around $38 a barrel. It has slid down to as low as $27 a barrel, a drop of around 28%. Continuing oil storage surpluses continue to weigh on the crude oil market. The lack of growth in China is another bearish factor.
Oil and gas companies issue large amounts of debt to fund their capital-intensive projects. The markets are concerned about possible defaults on this debt as companies struggle with lower revenues. The high-yield bond markets are also dropping. A significant amount of high-yield debt is issued by oil companies. Bondholders are reducing their exposure to the sector. Two high-yield debt mutual funds were forced to suspend redemptions in late 2015 as their investors ran for the exits.
George Soros, one of the greatest investors of all time, has said 2016 will see a financial crisis similar to that of 2008. At an investor’s forum in Sri Lanka, Soros said China and its struggle for growth is transferring its problems to the rest of the world. He also noted a rising interest rate environment as problematic for the rest of the world. Soros said in another interview that the European Union is on the verge of a collapse with the migrant crisis. He believes Angela Merkel is the key to solving the problem.
Bill Gross, the famed bond mutual fund manager, has suggested investors stick with U.S. Treasurys in the wake of the stock market volatility. Gross said investors are seeking to reduce leverage leading to the volatility. He also blamed the volatility on the failed attempts of central banks to prop up economies with low interest rates and quantitative easing. Gross said emerging market economies are beginning to see recessions in 2016.
Gloom and Doom for Global Markets in 2016?