Translated by Ollie Richardson for Fort Russ
4th January, 2016
Financial markets started the year with a fall. This morning (4th January) the Dow Jones fell 450 points, or 2.5%. S&P 500 fell by 2.1%; the fall that happened in the U.S represents the third largest drop since 1932. According to Bloomberg, the biggest drop — 6.9% — was recorded in 1932, at the height of the great depression; followed by 2.8% in 2001, when the stock exchange was still down because of the burst on March 10 2000 dot-com bubble.
Bloomberg argues that the collapse of the markets in America happened on the background of statistical data showing the biggest decline in production over the last six years. The European exchange crumble, according to Bloomberg, came after data on inflation in Germany, which unexpectedly slowed. The European index Stoxx 600 fell 2.6%, showing the worst start to a year in its history. Bloomberg drew attention to the fact that the first trading day of the year is a poor predictor of the future behavior of markets.
Data from the Dow Jones Indices suggest that the markets finished the year as they began - with growth if they grew in the first day or fall if they collapsed on the first trading day - 50% of cases. The reasons for falling of the Dow Jones Index are twofold: the Middle East and China, but more influenced by China, said the managing Director of Arbat Capital, Alexander Orlov.
Earlier on 4th January, the share collapse happened in China. Trading at the country's largest Shanghai stock exchange was halted after the fall of the key stock index Shanghai Composite by nearly 7%.
The Chinese are using this tool, designed to limit the fluctuations of securities, for the first time. The President of the Moscow interbank currency Association Alexey Mamontov said that it added some nervousness to the markets.
"China has been growing for 10-15 years, no one has ever seen how they will cope with the crisis, today they first blocked the game down, and it caused nervousness," he said. In China the problems were caused by the economic slowdown and the collapse in the stock market because of the ending Friday of a six-month moratorium period on the sale of shares to institutional investors holding more than 5%, adds Orlov.
"China continues slowing the economy, which is shown in the statistics released. According to some estimates, the economy shows the lowest growth rate in 25 years. Against the background of holidays and low liquidity due to the long Christmas weekend, all of these problems lead to increased volatility in the markets and the large amplitude of stock indices", — said the head of Department of development of relations with clients BCS Oleg Chikhladze.
However, Mammoth is sure that the fall of the American indices is a temporary phenomenon. In his opinion, dollar-denominated assets are the most reliable to date, so soon capital flight in them on the background of instability in the Middle East will be resumed. Chikhladze said the second cause of the fall of America is the escalation of the conflict in the Middle East, where tensions grew between Iran and Saudi Arabia.
"After the death of a Shiite preacher there was an attack on the Saudi Embassy in Iran, after Saudi Arabia broke off diplomatic relations with Iran. The example of Saudi Arabia was followed by Bahrain. All of this can result in the outbreak of an armed conflict, where the consequences for the world economy are difficult to predict," says Chikhladze. "There are fears that it all will result in a military confrontation, which will lead to a rise in oil prices," Oleg said