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U.S. and Global Markets Are In A Panic as New Year Begins

Bad news in China, North Korea, and low oil prices have world markets spooked as the year gets underway.

GettyImages-503605412
GettyImages-503605412

The new year is off to a rocky start. And it has the financial world spooked.

The new year is off to a rocky start. And it has the financial world spooked.

China’s economy, the world’s second largest, is in the midst of a slowdown that is spilling over into emerging markets like Brazil. Its benchmark equity index, the Shanghai Composite, this week had its worst day since the depths of a 40 percent summer drop, losing 7 percent of its value. Other stock markets around the world quickly followed suit: On Wednesday, after North Korea claimed it tested a hydrogen bomb, the Dow Jones Industrial Average dropped more than 300 points, expected to close near its lowest point in three months (it closed down 252 points). The DAX in Germany and the FTSE 100 in England are also sharply down this week. Crude oil prices are at their lowest levels since 2008. And it all comes on the heels of a December decision by the U.S. Federal Reserve to make it more expensive to borrow money after years of near zero interest rates, increasing the cost of big-ticket items from houses to cars to appliances.

This is just a sampling of the economic headwinds that investors, policy makers, and financial analysts worldwide are dealing with as 2016 gets underway.

It creates a “lot of angst,” David Spika, global investment strategist at GuideStone Financial Resources, told Foreign Policy on Wednesday.

Perhaps the greatest worry is China. Beijing this week again devalued its currency, the renminbi, sending its value to five-year lows against the U.S. dollar. Doing so will make Chinese goods cheaper to purchase, a boon for manufacturers there. But it is also raising concerns about a possible currency war in Asia, where other nations might artificially lower the value of their currency to compete with Beijing.

“This isn’t good for the rest of the world. Until China stops weakening the yuan, global markets will struggle to stabilize,” Koichi Kurose, Tokyo-based chief market strategist at Resona Bank Ltd., told Bloomberg. “The Chinese authorities may be trying to prop up the economy by boosting exports, but while that’ll help one part of China’s economy, it comes at the sacrifice of someone else.”

Chinese equities are also a cause for concern. Officials in Beijing are attempting to stop the stock rout by extending a ban on stock sales by large shareholders. Its central bank, the People’s Bank of China (PBOC), injected nearly $20 billion into the Chinese economy Tuesday, providing cash as an incentive to buy. Still, these efforts only draw more attention to weakness in China, where exports were down last year amid growing concerns Beijing would miss its 2015 growth target of 7 percent.

Add North Korea’s claimed nuclear test, and it creates more volatility in Asia, even as the White House disputed whether the hydrogen detonation actually took place. The test has already been condemned by China, traditionally Pyongyang’s closest ally. Any source of instability in Asia raises fears of a knock-on effect around the world, hence the Dow sell-off Wednesday.

“While the long-term investment implications are likely to be limited (as Pyongyang’s previous nuclear tests have proven), the short-term impact will likely keep markets extra jittery,” Win Thin, global head of emerging market currency strategy at Brown Brothers Harriman, wrote in a research note circulated Wednesday.

Still, Spika told FP that the panic seen during the first few days of 2016 is not necessarily indicative of the broader direction of the U.S. economy. He said he expects it to whether the storm this year.

“When we get into 2017, the odds of a shallow recessions start to increase,” he added.

Photo Credit: Spencer Platt/Getty Images

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