Will 2016 Be the Year of Unstable Markets?

Investors spent much of the last year worrying about a slowing Chinese economy, its effect on developing markets and a slowing global economy with pockets of recession. This year starts off with plummeting Chinese yuan and stocks and the prospect of more trouble in the Middle East. Will 2016 be the year of unstable markets? Reuters writes about a bumpy start to 2016.

Emerging markets suffered their biggest fall in four months on Monday as Chinese stocks slumped by 7 percent and deteriorating relations between Saudi Arabia and Iran drove Saudi foreign exchange forwards close to a 16-year high.

The fall in mainland Chinese stocks meant a bumpy start to 2016 for global markets. The decline was big enough to trigger a new “circuit breaker” in Beijing on the first day that it came into effect.

The sell-off followed weak manufacturing surveys which soured hopes China’s economy would start showing signs of improvement after a rough past six months.

Analysts also cited the imminent end of a ban on major shareholders selling stocks and changes to IPO regulations which could make it easier for companies to list, increasing supply.

Other Asian stocks followed Chinese shares lower. Indian stocks fell almost 2 percent to their lowest in nearly two weeks after manufacturing activity there contracted for the first time in more than two years.

We live in an economically interconnected world. When Asia, Europe or North America sneeze the rest of the world catches a cold. The specific issue with China is the need to convert their economy from export driven to consumer driven. Part of that process will require letting their currency float to a market driven level and that means letting the yuan fall substantially in the months ahead. A weaker Yuan will make Chinese products more competitive and could cause a trade war with China and the EU and USA. Meanwhile the price of oil is nearly at rock bottom and there is more trouble brewing in the Middle East.

Saudi Arabia, Iran and the Price of Oil

Saudi Arabia can pump oil cheaply as opposed to fracking of oil shale deposits in the USA or offshore drilling almost anywhere. They are still making money when a barrel of oil sells for $35 and may end up driving many drillers, oil exploration companies and even big oil operations out of business. Iran is complying with its agreement to back away from the production of materials for a nuclear bomb and sanction will be lifted letting them export oil again in large quantities. When will the big producers cut back to match current demand and let the price of oil rise? Oil will be one of the unstable markets for 2016 especially as Iran and Saudi Arabia are at swords points over political issues. CNN Money reports that Saudi Arabia cuts ties with Iran.

Oil prices were volatile Monday after Saudi Arabia severed diplomatic ties with Iran. The two countries have long been at odds, but Saudi Arabia’s execution of Shiite cleric Nimr al-Nimr on Saturday kicked off a new round of sparring between them that marks a dangerous shift in an already volatile region.

Al-Nimr was a fervent dissident against the Sunni Muslim Saudi royal family and called for their deposal during the Arab spring uprisings in 2011. After his execution, the Saudi embassy in predominantly Shia Tehran came under attack.

Geopolitical tensions in the Middle East typically cause prices to spike as traders worry about supply disruptions.

Armed conflict between these two nations would be devastating to oil production and would drive prices substantially higher.

US Stocks Futures

The market does not like uncertainty. This is seen as Dow futures plunge in response to a falling Chinese market and news from the Middle East. Market Watch looks at US stocks in this regard.

U.S. stock futures were sliding and pointed to a sharply lower open on Monday following a market rout in Europe and Asia, where a plunge in Chinese stocks triggered a trading halt. Investors also monitored developments in the Middle East, where a rift between Saudi Arabia and Iran raised concerns about further disruption to oil prices.

Will 2016 be the year of unstable markets? If that is to be the case investors will be wise to keep many of their positions short or protect themselves with options. As always do your own homework before investing.

Will 2016 Be the Year of Unstable Markets? PPT

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