February 5, 2016 - GLOBAL ECONOMY - The global economy seems trapped in a "death spiral" that could lead to further weakness in oil prices, recession and a serious equity bear market, Citi strategists have warned.
Some analysts — including those at Citi — have turned bearish on the world economy this year, following an equity rout in January and weaker economic data out of China and the U.S.
"The world appears to be trapped in a circular reference death spiral," Citi strategists led by Jonathan Stubbs said in a report on Thursday.
"Stronger U.S. dollar, weaker oil/commodity prices, weaker world trade/petrodollar liquidity, weaker EM (and global growth)... and repeat. Ad infinitum, this would lead to Oilmageddon, a 'significant and synchronized' global recession and a proper modern-day equity bear market."
Stubbs said that macro strategists at Citi forecast that the dollar would weaken in 2016 and that oil prices were likely bottoming, potentially providing some light at the end of the tunnel.
"The death spiral is in nobody's interest. Rational behavior, most likely, will prevail," he said in the report.
Crude oil prices have tumbled by around 70 percent since the middle of 2014, during which time the U.S. dollar has risen by around 20 percent against a basket of currencies.
The world economy grew by 3.1 percent in 2015 and is projected to accelerate to expand by 3.4 percent in 2016 and 3.6 percent in 2017, according to the International Monetary Fund. The forecast reflects expectations of gradual improvement in countries currently in economic distress, notably Brazil, Russia and some in the Middle East.
By contrast, Citi forecasts the world economy will grow by only 2.7 percent in 2016 having cut its outlook last month.
Overall, advanced economies are mostly making a modest recovery, while many emerging market and developing economies are under strain from the rebalancing of the Chinese economy, lower commodity prices and capital outflows.
Stubbs added that policymakers would likely attempt to "regain credibility" in the coming weeks and months.
"This is fundamental to avoiding a proper/full global recession and dangerous disorder across financial markets. The stakes are high, perhaps higher than they have ever been in the post-World War II era," he said.
Just 151,000 new jobs were created in January in the U.S., in the latest sign that the world's biggest economy is slowing. Economists are concerned about an industrial or manufacturing recession in the country, following some warnings from companies in earnings seasons and recent weak manufacturing activity and durable goods orders data.
However, some analysts say markets are overegging the prospect of a global slump.
"Many markets are now pricing in a significant probability of recession and when we talk about recession, we're talking particularly about a U.S. recession. Do you think that is likely or not? To me, the odds are too high; the market is pricing too high a probability," Myles Bradshaw, the head of global aggregate fixed income at Amundi, told CNBC this week.
Nasdaq sheds 3% amid massive tech sell-off
U.S. equities closed sharply lower on Friday amid a massive drop in technology stocks and as mixed U.S. employment data raised concerns the Federal Reserve may raise rates this year.
"It started with the uncertainty of the Fed and with the weak tech earnings ... it seems to have spread to the broader market," said JJ Kinahan, chief strategist at TD Ameritrade. "I think people are taking any unnecessary risk off before the weekend."
The three major indexes opened slightly lower, with the Dow Jones industrial average briefly trying for gains, but closed 211 points lower.
McDonald's and
Home Depot weighed the most on the index.
The S&P 500 index closed 1.85 lower percent, as information technology fell more than 3.35 percent. The Nasdaq composite fell 3.25 percent, as
Apple and the
iShares
Nasdaq Biotechnology ETF (IBB) dropped 2.67 percent and 3.19 percent, respectively.
Also weighing on the index were
Amazon and
Facebook, which closed down 6.36 percent and 5.81 percent, respectively.
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| Source: FactSet |
LinkedIn shares also tanked 43.63 percent after posting weak guidance on their quarterly results. "I think 60 percent [of the market sell-off] is that the Fed was going to raise rates," said Kim Forrest, senior equity analyst at Fort Pitt Capital. "The other 40 percent is LinkedIn. The quarter was good, but the guidance was not."
"Some of the big tech stocks have had weak earnings," said Randy Frederick, managing director of trading and derivatives at Charles Schwab. "One stock is not a bellwether for one sector, but when you get multiple stocks with negative earnings reports, then you start seeing [a sector] go lower."
Investors also digested data showing the U.S. economy added 151,000 jobs in January, according to the Bureau of Labor Statistics. Economists were expecting a gain of 190,000. The unemployment rate, however, fell to 4.9 percent from 5.0 percent, while wages rose 0.5 percent.
"There was something for the bulls and something for the bears. It depends on which part of the statistics you want to focus on," said Bruce McCain, chief investment strategist at Key Private Bank.
"This is a classic example of why the headline looks worse than the actual report," said Art Hogan, chief market strategist at Wunderlich Securities. "The key components of this report were positive."
He noted that average hourly earnings, average hours worked and labor force participation all rose last month.
"It's all about that wage number, and that the 151,000 number is still indicative of growth," said Peter Cardillo, chief market economist at First Standard Financial. "[Wages] could be a sticking point for the Fed."
The jobs report raised the odds of another Federal Reserve rate hike, said Arne Espe, senior portfolio manager at USAA Investments.
"We're back to pricing in a 50 percent chance for a rate hike in December," he said. " We were at less than 50 percent before the report."
The central bank hiked interest rates for the first time in nine years in December. Recent U.S. economic data has been mixed and, coupled with falling oil prices, have contributed to rising fears of a recession.
European stocks end lower after weak US jobs number
European markets finished lower on Friday after the latest U.S. jobs data showed a slowdown in employment in January.
The pan-European
STOXX 600
ended around 0.9 percent lower, with all major bourses in negative
territory as investors digested weaker-than-expected U.S. employment
data.
Germany's
DAX closed down around 1.1 percent, while the French
CAC and London's
FTSE finished down 0.9 percent and 0.7 percent respectively.
Nonfarm payrolls increased by a seasonally
adjusted 151,000 in January, the U.S. Labor Department said, falling
short of analysts' expectations. The figures are likely to influence the
hiking path the Federal Reserve takes on interest rates.
"Signs of a slowdown in hiring,
still-weak annual pay growth and disappointing survey data, all pitched
alongside an adverse financial market environment so far this year,
reduce the odds of the Fed hiking rates again in March," chief economist
at Markit, Chris Williamson, said.
U.S. equities fell on Friday after the jobs data was out.
Nikkei extends losses for fifth day, down 5.9% for the week
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| Kazuhiro Nogi | AFP | Getty Images |
Asian markets came under pressure on Friday, closing mixed despite a positive finish on Wall Street overnight, as a newly weaker dollar brought fresh concerns.
"The U.S. dollar basket has lost 3.2 percent since the close on Friday and 2.3 percent in two days, with Wednesday being the worst single day in [the dollar index] DXY in seven years," Evan Lucas, market strategist at spreadbetter IG, said in a morning note.
The
dollar index, where the dollar is weighted against a basket of currencies, was at 96.58.
Lucas added, "The 36 percent increase in the U.S. dollar in 12 months is clearly putting a strain on U.S. economic growth; U.S. competitiveness has been squeezed and the Fed is isolated as the only central bank to be 'normalizing' monetary policy."
In Japan, the
Nikkei extended losses for the fifth day in a row, with the index closing down 225.40 points, or 1.32 percent, at 16,819.59 on the back of a stronger yen. The index has shed 5.85 percent since Monday. The
dollar-yen pair fell to the 116-handle, at 116.82 in afternoon trade; earlier this week, the pair was trading above 120.
Lucas said, "[The Bank of Japan's] negative rates have done nothing to slow the appreciation of the Japanese yen since last week. [BOJ Governor Haruhiko] Kuroda and Co.'s attempts to drive export competitiveness and more investment diversification from Japan in the current environment is a tough ask."
Mark Matthews from Bank Julius Baer was more succinct: "Japanese stocks like it when the dollar rises, and don't like it when the dollar falls," he said in a morning note.
Japanese exporters closed mostly down, with
Toyota,
Nissan and
Honda seeing losses between 1.88 and 3.29 percent. Toyota reported an operating profit of 722 billion yen ($6.18 billion) in the October-December period, down 5.3 percent on-year, after market close. The Japanese carmaker also reported a net profit of 1.89 trillion yen, up 9.2 percent, on year, for the first nine months of the fiscal year ending on December 31, 2015.
Down Under, Australia's
ASX 200 closed down 4.15 points, or 0.08 percent, at 4,976.20, with the financial sector losing 0.70 percent. Energy and materials sectors finished in positive territory, buoyed by gains in commodities.
Across the Korean Strait, the
Kospi retraced early losses to close flat at 1,917.79.
In China, indexes gave up their marginal gains on the final trading day ahead of the Lunar New Year, when markets will remain closed for a week starting February 8. The
Shanghai composite closed down 17.07 points, or 0.61 percent, at 2,763.94, while the
Shenzhen composite fell 20.36 points, or 1.15 percent, to 1,750.70. Hong Kong's
Hang Seng index was up 0.62 percent.
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CNBC News.
