Daily Agenda: Chinese Equities Drop Sharply

Tensions between Saudi Arabia and Iran push oil futures higher; talk of another pharma megamerger emerges.


On the first trading day in 2016, the Shanghai Composite Index fell by 6.9 percent, shutting Chinese stocks markets early after prices breached both newly implemented circuit breakers. The selloff followed a weaker-than-forecast reading for the official December Caixin manufacturing purchasing-managers data on Friday, with the headline index contracting for the fifth consecutive month. In addition to ongoing concerns over China’s growth, equity market strategists there also noted that the looming release for institutional shareholders subjected to a six-month lockup during the volatile correction last summer contributed to the flight. Global equity markets sold off in sympathy, with indications from futures prices that U.S. markets may open down as well.

Tensions between Saudi Arabia and Iran escalate. Over the weekend, Saudi Arabia recalled all diplomatic staff from Iran after protesters in Tehran stormed the Saudi embassy. The execution of a prominent Shiite cleric in Saudi Arabia prompted the conflict. Oil prices responded, with Brent grade front-month futures contracts rising by more than 3 percent in London.

Alibaba’s online bank to raise capital. Media reports Monday indicated that Zhejiang Ant Small & Micro Financial Services Group, the financial services affiliate of Alibaba Group Holdings, will be holding a secondary funding round totaling more than $1 billion ahead of a planned initial public offering. The online payment and banking platform is currently valued at more than $45 billion based on the most recent equity round.

Swiss private banks hit with fines by the U.S. Geneva’s Bank Lombard Odier & Co. agreed to pay a fine totaling nearly $100 million to U.S. authorities after admitting that the bank helped wealthy American taxpayers hide assets. Last week rival Swiss private bank Julius Baer announced that it expected to pay more than $500 million to settle criminal charges over aiding U.S. tax evaders.

Singapore’s economy rebounded into year-end. Initial gross domestic product estimates for the final three months of 2015 issued today by the Singapore Trade Ministry indicate that the economy expanded at a significantly faster pace than expected by economists. The headline growth index rose by an annualized 5.7 percent for the period versus 1.7 percent in the prior quarter.

Another pharmaceutical mega-merger rumored. On Monday, multiple media outlets reported advanced discussions between Irish drug maker Shire and Bannockburn, Illinois-based Baxalta, a spinoff of hospital supply giant Baxter. The reports, leaked by anonymous sources, indicate that the total size of the transaction would exceed $30 billion.


Portfolio Perspective: Parallel Universes — Sean Darby, Jefferies

Although only investors and not economies or markets recognize the change in the year, we believe the dominant theme impacting shares in 2016 will once again be the reach for yield. Equally, equity markets should still be affected from the “over-reach for yield” resulting from the EM [emerging market] and commodity credit boom that occurred from 2009–’14.

Despite concerns over the lack of inflation and the efforts of central banks to avert deflation, flat yield curves are reflecting a world of low growth and low inflation. Equities are long-duration assets and this means that equities will remain relatively well bid within global financial assets but a close watch will need to be kept on U.S. real long-bond yields.

While credit markets widened going into year-end during thin trading, the good news is that there have been no signs that credit issuance has been impacted. Moreover, it also appears that fears over a 1994/98 EM-style crisis were unfounded. Flexible exchange rates and the long duration of foreign debt issued bought time for the EM central banks.

Whereas investors are quite right to recognize the policy divergence between the U.S. and Japan and Europe, in reality there are a host of subtle factors that could impact equities on a micro-level. For instance, we would argue that the increasing difference in global pricing power between manufacturing and service-oriented companies will have a much greater influence on profits. Furthermore, the weak global trade picture has been depressed by high inventory-to-shipment ratios in many EM economies and this is likely to keep global growth subdued into 1H16.

Sean Darby is chief global equity strategist for Jefferies in Hong Kong.