China, oil to keep pressure up on world stocks

Dubai:

Investors might have to relive the horror of another China-triggered market meltdown, similar to the one five months ago.

In the first week of 2016, the stage was set following a 1 per cent slide in the Chinese yuan and a fall in oil prices to the lowest level in 12 years. China’s main stock market index tumbled 10 per cent in a week, causing panic in world markets, giving Wall Street’s its weakest start to a year since 2001. Twice last week Chinese stocks were suspended after a key index tumbled more than 7 per cent.

“There are three key factors that will impact the world markets: one is China, oil prices, and also the regional tensions,” said Sebastien Henin, head of asset management at The National Investor. “It would be a combination of these three factors that would put some pressure across markets this week and coming weeks.”

“If things don’t improve on the international stage, there is a chance of more profit-taking across markets,” Henin said.

Further, a raft of data from China would also give signs of a further slowdown in what was once world’s fastest growing economy. The data points start with export and import figures on Wednesday, followed by GDP and trade data later in the month.

Henin also expects this negative sentiment to be mirrored in the UAE markets, which is also considered as a proxy to oil prices.

“Local markets may also go down. There is a chance of the 3,000 level acting as a resistance for markets,” Henin added. The most-watched Dubai Financial Market General Index has been on a downward trend since 2015, shedding a quarter of its value and trading below the psychological level of 3,000 mark.

Negative on oil

Brent crude prices, which hit its lowest level in more than a decade to $33 (Dh121.2) per barrel, may still continue to drop.

“There has not been any change on the fundamental side of the picture, so it’s still the position of oversupply and clear sign of getting any big bounce back in demand,” Edward Bell, commodities analyst with Emirates NBD.

“The financial positioning towards oil is very negative so we may have more downside to go if we look at what is happening in the options markets, where we are seeing more put options at lower prices. That would indicate that people are preparing for even worse conditions,” Bell said, adding “in the very short-term, we may see more downside in the oil price.”

“If we had some kind of disruption of a pipeline for example, there would be intense short covering, given the fact that how one-sided we are in this market,”

Bell expects a breach below $30 per barrel is a likelihood under current conditions, even as he see a gradual recovery in prices over the year. He is still sticking to the previous forecast of $55 per barrel for Brent crude on average in 2016. Since the sell-off in oil began 18 months ago, traders and investors have wondered how long and deep the slide would go as prices fell from above $100 a barrel to below $40, and looked poised to break below $30. Goldman Sachs has lowered its price forecast to $20.