Not All Heroes Wear CAPEs: Creation of a Global Stock Investment CEILING (Country Equity Index Leading Indicator for Near-term Gains)

Subject China's financial turmoil and its impact on global markets. Significance The renewed turmoil in China's financial markets in the first trading days of 2016 has undermined investor sentiment, wiping 2.3 trillion dollars off the value of global stock markets and leading to a surge in demand for safe-haven assets. While the Shanghai Composite index rebounded on January 8, it dropped again on January 11 by 5.3%, dragging down the US S&P 500 equity index, which dropped 6% in the first trading week of 2016, its worst start to the year on record and a sign of the extent to which China has become the most important sentiment determinant. Impacts The credibility of Chinese policymaking is undermined, heightening concerns about the country's slowdown and auguring badly for many EMs. Central banks will be another source of volatility, especially if investors lose confidence in the effectiveness of monetary policy. A weaker-than-expected dollar will pressure the ECB further to provide more monetary stimulus.

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Near-term financial market virus fears will be strong

Emerald Expert Briefings ◽

10.1108/oxan-db251023 ◽

2020 ◽

Keyword(s):

Financial Market ◽

Debt Financing ◽

High Yield ◽

Government Bonds ◽

Content Type ◽

The Third ◽

Global Recession ◽

Near Term ◽

Equity Index ◽

High Chance

Significance More than 80,000 cases have been confirmed in China, and almost 10,000 cases in 68 other countries across six continents. The Morgan Stanley Capital International (MSCI) benchmark world equity index has plunged by more than 10% since February 19. Many investors fled to government bonds, driving the benchmark US ten-year treasury yield to a record low of 1.1%. Heightening investors’ fears, China’s official survey of its manufacturing purchasing managers' index (PMI) fell to a record low in February. Impacts Markets are almost pricing in a global recession but if the outbreak ends by April-June, there is a high chance that this will be avoided. US high-yield debt saw the third-largest dollar outflows ever in the last week of February; firms will struggle to access debt financing. If the infection rate falls as spring takes hold and temperatures rise in the Northern Hemisphere, this will help curb the outbreak. A long correction may be due as stock markets have risen for twelve years, but the length of this drop is highly uncertain. Goldman Sachs and JP Morgan have cut their forecasts for US firms' profit growth this year towards zero; more downgrades could follow.

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