Daily Agenda: Pessimism Reigns with Another Chinese Decline

EU orders Belgium to collect unpaid corporate taxes; Shire-Baxalta merger to close; glam rocker David Bowie dead at 69.


Tomohiro Ohsumi

The second week of trading for 2016 has begun much like the first, with selling pressure spread across financial markets globally. The Shanghai Composite Index ended the session on Monday another 5.3 percent lower, bringing year-to-date losses to 15 percent, and prompting another sympathetic sell-off in Europe that drove the Stoxx 600 down by a small margin by midday. Meanwhile, West Texas Intermediate futures contracts for front-month delivery contracted by nearly 2 percent overnight. The pessimistic mood with which the New Year began for investors appears to remain firmly entrenched.

EU rules Belgium must secure back taxes. The European Commission on Monday ruled that Belgium had allowed tax breaks for more than 30 corporations that violated European Union laws, ordering the country to recover as much as $750 million. The ruling is the latest attempt by the Commission to enforce greater uniformity among the Union’s 28-member group.

Shire Baxalta deal to close. After months of negotiations and market speculation, Dublin–based pharmaceutical company Shire has agreed to buy Baxalta, a biopharmaceutical company based in Chicago suburb Bannockburn, Illinois, in a transaction valued at more than $30 billion in a combined cash and stock transaction. Baxalta had rejected an unsolicited offer from Shire in July 2015.

Rand plunges again. The South African rand declined sharply against major currencies in trading early on Monday, sliding by more than 8 percent versus the U.S. dollar before partially reverting. The currency of the second-largest African economy’s lost 25 percent of its value on a dollar basis in 2015 as international investors reacted to concerns over trade with China. In December, South African President Jacob Zuma shocked markets, and sent the rand reeling, by unexpectedly replacing his finance minister with an inexperienced backbencher, only to reverse course and fill the post with a previous finance minister.

David Bowie dead at age 69. Legendary pop musician David Bowie (born David Jones) died on Sunday after an 18-month battle with cancer, according to a statement from his family. Renowned for constant reinvention, Bowie influenced several generations of artists in multiple mediums. Also noted for his business acumen, Bowie in 1997 issued a series of bonds backed by future royalties in a pioneering leveraged acquisition that sparked interest among investors in securitized intellectual property.


Portfolio Perspective: Reactions and Overreactions — Adam Grimes, Waverly Advisors

One good way to understand market psychology is to look at the relative increase in a measure of implied volatility against a measure of change in equity markets. Simple percentage comparisons do not work as well as volatility-adjusted measures.

From this perspective, there is no evidence that markets are overreacting, or are overly emotional. If anything, the recent moves in the VIX were slightly understated for the magnitude of the market declines. In the short-term, this could point to further downside; markets snap back from emotional extremes, but persistent selling pressure can drive significant moves.

We think it is most constructive to switch to a near-term bearish bias, and to realize that we could see several weeks of this persistent selling pressure. For swing traders and active traders, there will likely be money to be made on the short side. For longer-term investors, there will be a flood of ominous commentary from the media, and increased volatility may challenge our convictions. However, these are the types of market movements that must be accepted as risks to long-term investors. To make the message very simple: We urge long-term investors to stay the course. There is no cause for excessive alarm or concern at the present time.

Adam Grimes is chief investment officer for Waverly Advisors in Pittsford, New York.