Publication date: 5 February 2016 | Covering: January 2016
Monthly Briefing
- January global market turmoil worst since 2009: S&P -5%; Shanghai -25% peak-to-trough; oil below US$30/barrel
- Fed December 15–16 historic rate hike (0.25–0.50%) immediately followed by global turbulence; pace of future hikes in question
- China activates then suspends stock market circuit breakers within first week of January; yuan pressure continues
- North Korea claims hydrogen bomb test January 6: seismic event in Korean peninsula; UN sanctions threat
- Davos World Economic Forum January 20–23: dominated by China slowdown fears and oil price collapse
- BOJ easing; Jamaica IMF EFF; NHT J$6.5 million ceiling; rates 0, 2, 4 per cent
December’s Historic Hike Met with January Market Shock
The Federal Reserve’s historic decision to raise interest rates for the first time since June 2006 — taken at its December 15 to 16 meeting, when the federal funds rate was lifted from 0 to 0.25 per cent to 0.25 to 0.50 per cent — had been greeted with equanimity at the time. Markets had priced in the hike for weeks, Chair Yellen’s post-meeting press conference was steady and measured, and equities closed higher on the day. But January 2016 brought a dramatically different picture. A combination of factors — China’s stock market circuit breakers amplifying selling pressure, continued yuan depreciation, oil prices sliding below US$30 per barrel, and fears about the global growth trajectory — produced the worst start to a calendar year for global markets since 2009. The S&P 500 fell more than 5 per cent in January, while European and Asian equities fell even more sharply. The episode immediately raised questions about whether the Fed’s December decision had been mistimed, and market pricing for additional 2016 rate hikes fell dramatically: where the Fed’s own December dot plot had projected four hikes in 2016, futures markets were pricing fewer than two by late January. The pace of the tightening cycle had been called into immediate question by the global market reaction.
China Circuit Breakers and Yuan Pressure
China’s financial authorities introduced stock market circuit breakers — automatic trading halts triggered by 5 and 7 per cent intraday declines in the CSI 300 index — at the start of January, in an attempt to reduce market volatility. The mechanism backfired dramatically: the threat of a halt triggered a rush to sell before trading was suspended, accelerating the declines it was meant to prevent. The circuit breakers were activated on 4 January and again on 7 January, with the market hitting the 7 per cent limit both times within minutes of opening. China’s securities regulator suspended the circuit breaker mechanism after just four trading days. The episode was a significant embarrassment for China’s financial authorities and added to investor anxiety about the quality of economic management in Beijing. The yuan continued to depreciate against the dollar through January, managed by the People’s Bank of China but in a direction that raised fears of larger devaluation to come. China’s economic data — GDP growth reported at 6.8 per cent for the fourth quarter of 2015, in line with the government target but regarded with some scepticism by external analysts — added to the uncertainty about the true pace of the Chinese slowdown.
North Korea’s Claimed Hydrogen Bomb Test
North Korea announced on 6 January that it had successfully tested a hydrogen bomb, a claim that, if accurate, would represent a significant advance in its nuclear weapons programme beyond the fission devices previously tested. Seismic data confirmed a nuclear test had occurred, though the yield and nature of the device remained disputed by outside nuclear experts: some analysts judged the seismic signature more consistent with a boosted fission device than a true thermonuclear weapon. The test prompted condemnation from the UN Security Council, the United States, South Korea, Japan, and China, and led to new discussions about further sanctions. The North Korean nuclear and missile programme represented the most acute ongoing proliferation risk on the planet and a persistent source of geopolitical uncertainty in Northeast Asia, a region of enormous importance to global trade and supply chains.
Jamaica Mortgage Market in January
Jamaica’s mortgage market opened 2016 against a backdrop of global financial turbulence but with a solid domestic policy foundation. The historic Fed rate hike of December had been absorbed, and Jamaica’s IMF EFF programme provided a stabilising macroeconomic framework. The Bank of Jamaica’s policy rate easing continued to support domestic lending conditions. The NHT’s J$6.5 million individual ceiling and tiered rates of 0, 2, and 4 per cent anchored the affordable housing finance market. Oil prices below US$30 per barrel were beneficial for Jamaica’s energy import bill, consumer prices, and the broader cost of living, partially offsetting the uncertainty from global financial market volatility. The January period is typically the slowest for mortgage origination, as the holiday season concludes and buyers assess their budgets for the year ahead.
Looking Ahead
The Fed’s January 26 to 27 meeting will provide the Committee’s first formal opportunity to respond to the January market turmoil: a hold is virtually certain, and the statement’s language on global conditions will be parsed closely for signals about the March meeting. The Bank of Japan’s January meeting and the ECB’s March review are both likely to involve further easing discussions. For Jamaica, the first quarter results under the IMF EFF programme and the preparation for the spring property market season are the primary near-term policy and market considerations. The NHT’s new scheme openings and the gradual transmission of the BOJ’s rate cuts to commercial mortgage rates are expected to drive gradual market improvement through the quarter.
Mortgage & Housing Finance Disclaimer: This publication is for general information only and does not constitute mortgage, financial, legal or investment advice. Mortgage products, lending criteria, interest rates and borrowing costs vary between lenders and may change without notice. Readers should obtain independent advice from a qualified mortgage adviser, financial adviser or legal professional before making financial or property decisions.
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