Markets tumble on bad news in key global economies

Over €700m wiped off Irish exchange equities and Euro Stoxx 600 has worst start ever

Federal Reserve chair Janet Yellen: some claim the Federal Reserve increased interest rates prematurely last month. Photograph: Saul Loeb/AFP/Getty Images

Federal Reserve chair Janet Yellen: some claim the Federal Reserve increased interest rates prematurely last month. Photograph: Saul Loeb/AFP/Getty Images

 

Bad news from the world’s biggest economies and growing tensions in the Middle East sent global stock markets tumbling on the first day of 2016 trading yesterday.

More than €700 million was wiped off the total value of the equities listed on the Irish stock exchange, where investors sold shares in leading companies such as CRH and Smurfit, amongst others.

However, traders said that Dublin was spared the worst of a rout that saw leading European indices all lose considerably ground.

London’s FTSE 100 was down 2.4 per cent, while Germany’s DAX fell 4.3 per cent.

Worst start

Surveys showing that manufacturing in the US and China slowed last month, combined with growing tension between Iran and Saudi Arabia, led to investors ditching shares in favour of safer bets such as government bonds .

Chinese authorities used new anti-volatility rules to halt trading on the country’s Shanghai and Shenzhen stock exchanges as shares fell 7 per cent following publication of the poor manufacturing data.

The Caixin/Market purchasing managers’ index slid to 48.2 in December – any reading below the benchmark 50 indicates a fall in output – which began the run on equities that spread from Asia to Europe and US.

Later in the day, the equivalent index in the US also returned 48.2, adding to investors’ fears and prompting some comment that the country’s central bank, the Federal Reserve (Fed), increased interest rates prematurely last month.

Alan McQuaid, economist with Irish stockbrokers, Merrion Capital, described both countries’ data as weak “then you also have the political tensions between Saudi Arabia and Iraq, those are the two key issues”, he said. “But it’s early days yet, people can read too much into disappointing numbers.”

He suggested that a Fed meeting tomorrow could help to clarify US economic policymakers’ intentions.

The central bank’s chairwoman, Janet Yellen, last month indicated that it could increase interest rates four times this year.

Look aggressive

However, Ronan Reid, of Cantor Fitzgerald Ireland, thought it was unlikely that Yellen will change tack. “She has been fairly clear and she has pulled already the trigger,” he said.

Mr Reid predicted that differences in policy between the US, which is trying to dampen inflation, and the EU, which is trying to stimulate it, could lead to further volatility on equity markets this year.

Oil rose briefly after the Saudi Arabian government cut ties with Iran following an attack on its embassy in Tehran by demonstrators protesting the execution of a prominent Shia cleric. However, its price slid back again later in the day. Brent crude dropped 9 cents to $37.19 a barrel while West Texas intermediate dropped 26 cents, or 0.7 per cent, to $36.78 a barrel.

Investors moved to less risky instruments such as government bonds, whose yields fell by about 1 per cent. Mr Reid said that this could be good news for the Republic, which is due to issue bonds later this month, and looks likely to be able to do so at a reduced borrowing cost.