RBS issues stark warning of re-run of 2008
Tue close: Markets on both sides of the Atlantic were heading for an upturn after a volatile week.
The FTSE 100 was up by about 57 points near the close although the Dow pared back earlier gains to trade marginally in positive territory.
Traders appeared to set aside a warning from RBS that major stock markets could fall by a fifth with the oil price plummeting to $16 a barrel.
The bank’s analysts say there are signs similar to the turbulent months before the Lehman crisis in 2008.
“Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small,” it said in a client note.
“China has set off a major correction and it is going to snowball. Equities and credit have become very dangerous, and we have hardly even begun to retrace the ‘Goldilocks love-in’ of the last two years,” said Andrew Roberts, the bank’s credit chief.
Mr Roberts expects Wall Street and European stocks to fall by 10% to 20%, with even an deeper slide for the FTSE 100 given its high weighting of energy and commodities companies.
“London is vulnerable to a negative shock. All these people who are ‘long’ oil and mining companies thinking that the dividends are safe are going to discover that they’re not at all safe,” he said.
In a new report from Standard Life Investments, Alex Wolf, emerging markets economist, said: “In China, we expect policymakers to continue walking a tightrope – balancing enough fiscal and monetary stimulus to prevent a sharper growth collapse, while slowly proceeding with supply side reforms to remove excess capacity.
“Slowing Chinese demand, which we believe was worse than official data reflected, was one of the largest causes of the emerging market trade and output contraction experienced last year. As such we see some room for cyclical upside, as policy measures take effect.
“However, our longer-term outlook on China has become increasingly negative. Our own view is that GDP growth is closer to 5% than the 6.9% reported by the Chinese authorities.
“Although we believe policy makers will avoid a hard landing, it is becoming more likely that Chinese leaders will not enact necessary reforms quickly, especially of state owned enterprises (SOE). SOEs are at the heart of China’s problems, and reforms here would deliver the biggest dividends from a growth and rebalancing perspective, but Beijing has been dragging its feet.”
Caxton FX analyst Nicholas Ebisch said China’s influence on the world economy is being misunderstood.
“With just 37% of China’s shares available to trade, and only a small fraction owned by foreigners, this week saw tide of Chinese investors selling their stocks and weakening the yuan. While this reaction is justified, because so many countries rely on China as a major trading partner, what is interesting on this occasion is the ripple effect which is occurring as a result of the Chinese equity market sell-off. Chinese markets dropping and industrial production slowing has led to a decline in commodity prices which leads to weakness in emerging market economies. From there it is a vicious circle of commodity-based countries continually downgrading growth expectations as oil prices fall, which heavily affects markets globally.
However, China’s influence is misunderstood. China has so much power because of its enormous capacity for consumption and production, but western economies have their own individual economies which are largely independent of China. Although the west has many dealings with China, it is a small piece of the pie when it concerns the overall economy. China’s influence is growing and investors sometimes do not know how to interpret market movements, and panic to sell their own assets as a result. Scare-mongering over the Chinese Boogeyman is very prevalent in mainstream media, but the influence of China is much more psychological in today’s interconnected markets than the actual proportion of Chinese business represented in the rest of the world. “
In today’s trading announcements, Debenhams, Britain’s No.2 department store chain, posted higher than expected sales in the last 19 weeks, driven by strong Christmas trading and growing online shopping.
The company said on Tuesday that like-for-like sales for the 19 weeks to 9 January were up 1.9%, beating analyst expectations for them to rise 0.3%.
Morrisons, the supermarket group, beat expectations, reporting a first period of positive underlying sales since 2012. Sales at stores open over a year, excluding fuel, increased 0.2% in the nine weeks to 3 January against a forecasted decline of 0.2%.
Direct Line Insurance Group estimates insurance claims for the series of storms in December will total between £110m and £140m.
Greggs the baker reported a 5.2% rise in sales for the 52 weeks to 2 January 2015 and said it expected full year results to be in line with expectations.
Statutory total sales for the 52 weeks of 2015 were up 3.7% against a 53 week year in 2014.
Greggs has completed 202 refits, as well as 20 conversions of it larger bakery cafés, while it opened 122 shops last year with 74 closures.