Tag Archives: Global Economy

Wall Street sinks after Fed fails to impress

(Reuters) – Wall Street dropped sharply on Wednesday after the U.S. Federal Reserve frustrated stock investors hoping for a strong sign it might scale back future interest rate hikes because of recent financial and economic turmoil.

In a widely expected decision, the Fed kept interest rates unchanged and it said it was “closely monitoring” global economic and financial developments, but it maintained an otherwise upbeat view of the U.S. economy.

With plummeting oil prices and fears of slower economic growth in China sending the S&P 500 down 8 percent in 2016, investors saw the Fed’s conciliatory comments as a step in the right direction.

But some on Wall Street had hoped an even stronger indication that policymakers might scale back the pace of future interest rate hikes.

“It sounds like they are unimpressed with what has happened in the markets, that it has been insufficient to change their plans. That’s the takeaway and it’s why the market is going down,” said Stephen Massocca, Chief Investment Officer of Wedbush Equity Management LLC in San Francisco.

That was enough to reverse earlier gains driven by a jump in crude prices after Russia said it was discussing the possibility of cooperation with OPEC and U.S. data showed an increase in short-term demand.

With fourth-quarter corporate reports pouring in, earnings of S&P 500 companies on average are expected to drop 4.9 percent, according to Thomson Reuters data. Excluding energy, earnings are expected to grow 1.3 percent.

The Dow Jones industrial average ended down 1.38 percent at 15,944.32 points while the S&P 500 lost 20.68 1.09 percent to 1,882.95. The Nasdaq Composite dropped 2.18 percent to 4,468.17.

Eight of the 10 major S&P sectors fell, led by the tech sector’s 2.46-percent descent.

Apple’s shares fell 6.57 percent after the iPhone maker reported its slowest-ever rise in shipments on Tuesday, while Boeing lost 8.9 percent, its biggest fall since August 2011.

Textron slid 13.36 percent while Tupperware sank 14.8 percent. Both companies’ revenue missed estimates.

A weaker-than-expected 2016 forecast helped push VMware shares down 9.82 percent.

Among the few gainers, Biogen rose 5.15 percent after its profit and revenue beat expectations.

After the bell, Facebook posted fourth-quarter revenue above expectations and its stock rose 4.7 percent.

Declining issues outnumbered advancing ones on the NYSE by 1,900 to 1,145. On the Nasdaq, 1,943 issues fell and 816 rose.

The S&P 500 index showed three new 52-week high and seven new lows, while the Nasdaq recorded 10 new highs and 89 lows.

About 8.8 billion shares changed hands on U.S. exchanges, below the 8.5 billion daily average for the past 20 trading days, according to Thomson Reuters data.

(Reporting by Abhiram Nandakumar in Bengaluru; Editing by Anil D’Silva and Nick Zieminski)

Fed keeps interest rates steady, closely watching global markets

WASHINGTON (Reuters) – The U.S. Federal Reserve kept interest rates unchanged on Wednesday and said it was “closely monitoring” global economic and financial developments, signaling it had accounted for a stock market selloff but wasn’t ready to abandon a plan to tighten monetary policy this year.

The decision by the central bank’s rate-setting committee was widely expected after a month-long plunge in U.S. and world equities raised concerns an abrupt global slowdown could drag on U.S. growth.

Fed policymakers said the economy was still on track for moderate growth and a stronger labor market even with “gradual” rate increases, suggesting its concern about global events had diminished but not squashed chances of a rate hike in March.

“The committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation,” the Fed said in its policy statement following a two-day meeting.

Wall Street fell after the statement, with the Standard & Poor’s 500 index closing down more than 1 percent. Prices for U.S. Treasuries were mixed, while the dollar extended losses against a basket of currencies.

In an indication the Fed was taking global risks seriously, a prior reference to the risks to the economic outlook being “balanced” was removed from its statement. Instead, it said it was weighing how the global economy and financial markets could affect the outlook.

“It is clear that several FOMC members have become more worried,” said Harm Bandholz, an economist at Unicredit in New York, referring to the Fed’s rate-setting Federal Open Market Committee.

Shrugging off economic weakness in China, Japan and Europe, the Fed last month raised its key overnight lending rate by a quarter point to a range of 0.25 percent to 0.50 percent and issued upbeat economic forecasts that suggested four additional hikes this year.

Wall Street’s top banks, however, expect only three rate increases before the end of the year, according to a Reuters poll released after the Fed’s statement on Wednesday. That was in line with expectations earlier in January.

Investors are betting on one quarter-point rate increase in 2016.

Prices for Fed funds futures on Wednesday showed traders had pushed back bets for the next rate hike to July from June and modestly trimmed bets on a March hike.

“The Fed has maintained its composure in the face of global pressures,” said Joe Manimbo, an analyst at Western Union Business Solutions.

JOB GAINS

U.S. exports took a hit last year, largely due to the impact of a strong dollar, but consumer spending accelerated and overall employment surged by 292,000 jobs in December.

The Fed said on Wednesday that a range of recent labor market indicators, including “strong” job gains, pointed to some additional firming in the job market.

Oil prices have also plummeted this year, which could keep U.S. inflation below the Fed’s 2 percent target for longer, but the central bank said it still expects the downward inflationary pressure from lower energy and import prices to prove temporary.

Policymakers will be able to sift through the January and February U.S. employment reports before their next policy meeting in March.

(Reporting by Jason Lange and Howard Schneider; Additional reporting by Lindsay Dunsmuir; Editing by David Chance and Paul Simao)

Oil fuels ‘schizophrenic’ rebound on Wall Street

(Reuters) – Wall Street rebounded over 1 percent on Tuesday, driven by a surge in oil prices and strong quarterly results from 3M, Johnson & Johnson and Procter & Gamble.

All 10 major S&P sectors ended higher, led by a 3.78-percent rise in the energy sector. Crude prices settled up 3.7 percent on hopes that OPEC and non-OPEC producers would tackle an unrelenting supply glut.

With oil at 12-year lows and threatening to put higher-cost producers out of business, investors have been reeling from a turbulent start to the year that has left the S&P down 7 percent from the end of 2015.

“This is a schizophrenic market. Big up days, big down days. No real direction,” said Tim Ghriskey, chief investment officer of Solaris Group in Bedford Hills, New York. “We need some stability in oil prices for the markets to calm down from here and become less volatile.”

Laser-focused on Tuesday’s rebound in crude prices, Wall Street shrugged off a 6 percent slump overnight in Chinese shares, sparked by jitters over Beijing’s ability to calm domestic markets.

That left the gap between U.S. and Chinese stock indexes at its widest since at least August.

The Dow Jones industrial average ended 1.78 percent higher at 16,167.23 points and the S&P 500 gained 1.41 percent to 1,903.63.

The Nasdaq Composite added 1.09 percent to 4,567.67.

While the U.S. Federal Reserve is not expected to move on interest rates at its two-day meeting, which began on Tuesday, investors will parse the Fed’s commentary to gauge how recent global turmoil affects the likelihood of future rate hikes.

Johnson & Johnson was the biggest influence on the S&P, up 4.96 percent, while Procter & Gamble rose 2.55 percent. Both companies reported profits that beat estimates.

Exxon climbed 3.68 percent, while Chevron rose 3.99 percent.

3M jumped 5.24 percent, giving the biggest boost to the Dow, after better-than-expected quarterly profit.

Overall profit expectations remain weak, largely because of oil. Earnings of S&P 500 companies on average are expected to fall 4.9 percent, according to Thomson Reuters data. Excluding energy, earnings are expected to grow 1.1 percent.

About 7.9 billion shares changed hands on U.S. exchanges, below the 8.2 billion daily average for the past 20 trading days, according to Thomson Reuters data.

Advancing issues outnumbered decliners on the NYSE by 2,591 to 507. On the Nasdaq, 2,010 issues rose and 809 fell.

The S&P 500 index showed three new 52-week highs and seven new lows, while the Nasdaq recorded eight new highs and 75 lows.

(Additional reporting by Abhiram Nandakumar in Bengaluru; Editing by Nick Zieminski)

Wall Street resumes 2016 slide as energy stocks tumble

(Reuters) – Wall Street sold off on Monday, pulled lower by further weakness in oil prices as energy shares led declines, with major indexes retreating after last week’s strong gains.

Oil prices fell 6 percent on concerns of oversupply after news that Iraq’s output reached a record last month.

The S&P energy group dropped 4.5 percent, the worst performing sector. Exxon and Chevron each fell more than 3 percent, while ConocoPhillips tumbled 9.2 percent after Barclays said the company should cut its dividend by at least 75 percent.

The major indexes each fell more than 1 percent, reversing much of a two-session rally that marked Wall Street’s first week of gains in the year. All 10 major S&P sectors finished the session lower.

During the poor start for the year for U.S. stocks, their performance has closely correlated with the price of oil. The commodity’s dramatic 1-1/2-year slide has sparked broad concerns about a global economic slowdown.

“Today is all about oil,” said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles.

“Better oil markets Thursday and Friday led to better equity markets. A $2 retracement in oil today, it’s not surprising to see a retracement in the equity indices.”

The Dow Jones industrial average fell 208.29 points, or 1.29 percent, to 15,885.22, the S&P 500 lost 29.82 points, or 1.56 percent, to 1,877.08 and the Nasdaq Composite dropped 72.69 points, or 1.58 percent, to 4,518.49.

Investors will look for insight about the economy’s direction later this week as many heavyweight companies report results. Federal Reserve policymakers meet on Tuesday and Wednesday for the first time since raising interest rates in December.

“The macroeconomic reality is catching up to equity valuations, and you’re seeing folks say, ‘I’m going to take my winnings and get out of the way for a while,'” said Jeff Buetow, chief investment officer at Innealta Capital in Austin, Texas.

D.R. Horton shares fell 4.7 percent to $26.40 as the No. 1 U.S. homebuilder reported lower-than-expected revenue as its home sales fell in all regions but the Southeast.

Tyco International jumped 11.6 percent to $34.15 after Johnson Controls said it would merge with the Ireland-based fire protection and security systems maker. Johnson Controls dropped 3.9 percent to $34.21.

Shares of Dynegy and NRG Energy slumped 11.5 percent and 9.6 percent, respectively, after the U.S. Supreme Court upheld a major Obama administration electricity markets regulation.

Caterpillar dropped 5 percent to $57.91 after Goldman Sachs cut its rating on the stock to “sell”.

Twitter fell 4.6 percent to $17.02 after Chief Executive Jack Dorsey said four senior executives would leave the social media company.

About 7.9 billion shares changed hands on U.S. exchanges, slightly below the 8.1 billion daily average for the past 20 trading days, according to Thomson Reuters data.

Declining issues outnumbered advancing ones on the NYSE by 2,642 to 466, for a 5.67-to-1 ratio on the downside; on the Nasdaq, 2,132 issues fell and 716 advanced for a 2.98-to-1 ratio favoring decliners.

The S&P 500 posted 3 new 52-week highs and 22 new lows; the Nasdaq recorded 12 new highs and 103 new lows.

(Reporting by Lewis Krauskopf in New York, additional reporting by Abhiram Nandakumar in Bengaluru; Editing by Anil D’Silva and Nick Zieminski)

Wall Street rally stamps exclamation point on volatile week

(Reuters) – Wall Street surged 2 percent on Friday to wrap up its first positive week of 2016 as a cold snap in the United States and Europe sent oil prices sharply higher.

A 4.3-percent jump in the S&P energy sector laid the foundation for the S&P 500’s strongest session so far this year.

Crude prices, recently under pressure from a global glut, recovered 9 percent as harsh winter weather boosted demand for heating oil and traders cashed in short positions following a steep drop this month.

After dropping earlier this week to 2014 lows, the S&P 500 has recovered in the past two sessions to end the week 1.4-percent higher. But the index is still down 7 percent in 2016 and remains at levels touched last August when fears of trouble in China’s economy rattled global markets.

“Trying to push stocks up from this level is a bit more difficult than pushing them down. We could be in a very wide range for a long period of time,” said Warren West, principal at Greentree Brokerage Services in Philadelphia.

The Dow Jones industrial average rallied 1.33 percent to finish the session at 16,093.51 points while the S&P 500 surged 2.03 percent to 1,906.9.

The Nasdaq Composite jumped 2.66 percent to 4,591.18.

The recent volatility has led to a spike in volume. About 9.1 billion shares changed hands on U.S. exchanges, well above the 8.0 billion daily average for the past 20 trading days, according to Thomson Reuters data.

U.S. economic data on Friday showed existing home sales soared nearly 15 percent in December, handily beating estimates and recovering from a 10.5 percent fall in November.

Apple rose 5.32 percent and gave the biggest boost to the S&P 500 and the Nasdaq. Despite widespread concerns about potentially weak iPhone demand, Piper Jaffray recommended buying Apple’s shares heading into its quarterly results next week.

Fourth-quarter earnings reports are likely to offer little cheer, with S&P 500 companies on average expected to post a 4.3 percent decline in profit, according to Thomson Reuters data.

Shares of General Electric declined 1.22 percent after its quarterly revenue missed analysts’ estimates.

American Express fell 12.10 percent after a disappointing earnings forecast.

Schlumberger rose 6.10 percent. The world’s biggest oilfield services company reported better-than-expected profit and set a $10 billion buyback program.

Advancing issues outnumbered decliners on the NYSE by 2,806 to 329. On the Nasdaq, 2,308 issues rose and 527 fell.

The S&P 500 showed three new 52-week highs and seven new lows, while the Nasdaq recorded 13 new highs and 50 new lows.

(Additional reporting by Abhiram Nandakumar in Bengaluru; Editing by Nick Zieminski)

Badly bruised Wall Street finds solace in oil rebound

(Reuters) – Wall Street staged a modest rally on Thursday as oil prices recorded their biggest gain this year and ECB President Mario Draghi raised hopes of more stimulus for Europe.

Seven of 10 major S&P 500 sectors climbed, with a 2.88-percent jump in energy stocks leading the way.

Helping global and U.S. stocks, the European Central Bank kept its main rates on hold and Draghi said the central bank would “review and possibly reconsider” its monetary policy as soon as March. Many analysts had not expected a rate cut before June.

Also boosting share prices, oil spiked from a 12-year low after U.S. crude stockpiles did not rise as much as feared.

In the prior session, the relentless drop in oil prices and fears of a China-led global economic slowdown had sent the S&P 500 to its lowest since 2014. The index remains at lows not seen since September last year.

A lack of upbeat technical measures made some investors doubt that Thursday’s gains would hold, and many remained cautious the market could fall further.

“It’s a different situation than in previous years when you could buy the dip and be very confident,” said Bruce Bittles, chief investment strategist at Robert W. Baird & Co in Nashville. “Here you have a trend that has turned negative and a Fed that is far less friendly than in 2012, ’13 or ’14.”

Billionaire investor George Soros told Bloomberg TV he shorted the S&P 500.

With fourth-quarter reporting season under way, S&P 500 companies on average are expected to post 4.5-percent lower earnings, according to Thomson Reuters data. But excluding the badly bruised energy sector, earnings are seen growing 1.6 percent.

The Dow Jones industrial average ended 0.74 percent stronger at 15,882.68 points and the S&P 500 gained 0.52 percent to 1,868.99. Earlier in the day, the S&P 500 was up as much as 1.64 percent before losing most of that gain.

The Nasdaq Composite edged up 0.01 percent to 4,472.06.

The recent volatility has led to a spike in volume. About 9.9 billion shares changed hands on U.S. exchanges, compared to the 7.8 billion daily average for the past 20 trading days, according to Thomson Reuters data.

Home Depot gave the biggest boost to the Dow, rising 3.23 percent after JP Morgan said warm weather could help the home improvement company.

Kinder Morgan surged 15.6 percent as the pipeline company outlined plans to cut debt and spending, raising the chances of a higher dividend.

Union Pacific fell 3.55 percent after the railroad operator said weak business conditions would persist in 2016, a warning that also weighed on its peers.

The S&P 500 posted no new 52-week highs and 14 new lows; the Nasdaq recorded 4 new highs and 91 new lows.

Advancing issues outnumbered declining ones on the NYSE by 2,003 to 1,075, for a 1.86-to-1 ratio on the upside; on the Nasdaq, 1,508 issues rose and 1,292 fell for a 1.17-to-1 ratio favoring advancers.

(Editing by Nick Zieminski)

Market tailspin hastens the economic shock it fears

LONDON (Reuters) – One of the biggest worries about this month’s sudden seizure in world markets is how puzzled investors have been left by it, and how many are just wishing it away as a temporary blip.

History suggests governments and central banks would do well to sit up and take notice, but with policy coordination at its lowest ebb in decades, a coherent response is unlikely.

With almost $6 trillion wiped off the value of global stock markets since the start of the year and another 25 percent off already low oil prices, there is a real risk investor anxiety itself will be the catalyst for a world recession.

And when market turbulence starts to crystallize the very problem investors are worried about — what wonks call a negative feedback loop — then these rare but dangerous spirals in confidence are notoriously difficult to halt.

By any measure, we are in historic territory.

Over the past 28 years — or 336 months — only 12 months have seen bigger losses in the MSCI World stock index than January 2016. Over half of those were associated with major market crises, including the Lehman Brothers bust of 2008-09, the dot.com implosion of 2001-02 and the emerging markets crash of the late 1990s.

Lowering the International Monetary Fund’s 2016 world growth forecast by another 0.2 percentage points to 3.4 percent this week, IMF chief economist Maurice Obstfeld said markets were reacting ‘very strongly’ to bits of evidence in a volatile, risk averse climate — but one where little fundamental had changed.

His predecessor Olivier Blanchard, now writing for Washington’s Peterson Institute, sympathizes with that view but warned against ignoring the seizure in markets.

“How much should we worry? This is where economics stops giving an answer,” Blanchard said.

“If … the stock market slump lasts longer or gets worse, it can become self-fulfilling. Low stock prices lasting for long lead to lower consumption, lower demand, and, potentially, to a recession.”

U.S. bank Morgan Stanley said on Tuesday it now sees a 20 percent chance of a 2016 world recession, as defined by sub-2.5 percent growth rate that is needed to keep pace with population gains.

FEAR ITSELF?

But why all the new year panic? Most economists blame a confluence of events rather than any sudden shock.

China’s deepening slowdown, pressure to devalue its yuan and its increasingly perplexing currency policy are all potential game-changers but have been building for months.

So too has the collapse in oil prices and other commodities, now more than 18 months old albeit a seemingly bottomless slide that is feeding off the China concerns.

These were joined last month by the first rise in U.S. interest rates in a decade which, by bolstering the already pumped-up U.S. dollar, has arguably exaggerated both the oil price fall and China’s yuan conundrum and capital flight.

Add to that potent mix the currency, commodity and interest rate pressures on emerging countries from Russia and Brazil to South Africa and the Gulf, an unwinding of these countries’ sovereign investments overseas, and investor flight from the equity and bonds of energy and mining companies.

Everyone can see a spiral forming, but few see where it ends. The threat of a major re-set of global market valuations amid high volatility is enough for many conservative investors to go to ground until it all plays out.

The now famous “sell (mostly) everything” note issued by Britain’s RBS last week was not a mere throwaway. It focused on the risk of markets snowballing as world trade and credit growth struggle, currency wars go up a gear and China and oil feed off each other. A 10-20 percent stock reversal was its best guess.

“The world is in trouble,” it said.

If so, where’s the cavalry?

By consensus, there appears to be about as much chance of a confidence-boosting grand economic policy agreement this year as there is of oil prices returning to $100 a barrel.

Coincidentally, China chairs the G20 group of world economic powers this year. Finance chiefs meet in Shanghai next month.

But internal dilemmas mean global coordination is likely to be low on Beijing’s priority list.

The U.S. Federal Reserve also paid little heed to international concerns when hiking rates last month, while Saudi Arabia has shown scant consideration for other oil exporters as it plays out a crude price war to protect market share against U.S. shale producers.

Germany has been at loggerheads with much of the rest of the euro zone and G7 partners for years over fiscal policy and austerity.

Harvard economist Jeffrey Frenkel notes that global economic cooperation has been stymied by international differences and domestic political divisions on policy, as well as growing disagreement between economists on how to model the world.

“When two players sit down at the board, they are unlikely to have a satisfactory game if one of them thinks they are playing checkers and the other thinks they are playing chess,” he wrote in a paper this month.

(Additional reporting by Jamie McGeever; Editing by Catherine Evans)

Wall Street plummets further as oil slide continues

(Reuters) – Wall Street’s recent selloff deepened on Wednesday, with the S&P 500 closing at its lowest in over a year as U.S. oil prices plummeted to 2003 lows.

The equities rout was widespread, hitting nine of the 10 major S&P sectors. The small-cap Russell’s 2000 index fell 3.6 percent before reversing its loss late in the session.

The beaten-down S&P energy sector fell 2.93 percent, leading the losers. Exxon dropped 4.21 percent and Chevron slumped 3.10 percent.

Collapsing oil prices and fears of a slowdown in China, the world’s second largest economy and a key market for U.S. companies, have led the S&P 500 to drop 9 percent this year. In the past six months, the energy sector has fallen 26 percent.

“The fear is, ‘Is tomorrow going to bring more selling?’ People are not even thinking about today, they’re thinking about tomorrow,” said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.

U.S. crude sank 6.6 percent on Wednesday as a supply glut bumped up against bearish financial reports that deepened worries over demand.

But a late-day bounce in U.S. oil prices helped reduce losses in stocks.

“If you look at crude prices, they are shooting right back up,” Randy Frederick, managing director of trading and derivatives for Charles Schwab in Austin, said ahead of the close.

The S&P 500 ended down 1.17 percent at 1,859.33, its lowest close since October 2014. It had fallen as low as 1,812.29.

The Dow Jones industrial average ended 1.56 percent lower at 15,766.74 points.

After a brief late-day rally into positive territory, the Nasdaq Composite lost steam and ended down 0.12 percent at 4,471.69.

The CBOE volatility index, Wall Street’s fear gauge, jumped 5.9 percent to 27.59.

Strength last year in Netflix, Facebook and a handful of other technology stocks masked troubled sentiment in other S&P 500 components, said R Squared portfolio manager Riad Younes.

“You had a crowded trade on a few names that kept the average much higher than it should be,” Younes said. “It feels like a bear market for the average stock.”

IBM weighed the most on the Dow, falling 4.88 percent after disappointing earnings report.

Netflix ended down 0.14 percent despite better-than-expected growth in its subscriber base.

An unusually high 12.5 billion shares changed hands on U.S. exchanges, well above the 7.8 billion daily average for the past 20 trading days, according to Thomson Reuters data.

The New York Stock Exchange recorded 2,271 stocks advancing stocks and 883 decliners. On the Nasdaq, 1,551 issues fell and 1,331 advanced.

The S&P 500 posted no new 52-week highs and 182 new lows; the Nasdaq recorded 5 new highs and 728 new lows.

(Additional reporting by Abhiram Nandakumar; Editing by Jeffrey Benkoe and Nick Zieminski)

As leaders meet in Davos, emerging economies going downhill fast

DAVOS, Switzerland (Reuters) – More than a trillion dollars of investment flows has fled emerging markets over the past 18 months but the exodus may not even be halfway done, as once-booming economies appear trapped in a slow-bleeding cycle of weak growth and investment.

While developing economies are no stranger to financial crises, with several currency and debt cataclysms infecting all emerging markets in waves over recent decades, leaders gathering for this year’s World Economic Forum in Davos in the Swiss Alps are fearful that this episode is much harder to shake off.

Seeded by fears of tighter U.S. credit and a rising U.S. dollar, and coming alongside a secular slowdown of China’s economy and an implosion of the related commodity ‘supercycle’, there’s growing anxiety that there will be no sharp rebound at the end of this downturn to reward investors who braved out the worst moments.

“The global backdrop and the drivers for emerging markets are very different from 2001,” David Spegel, head of emerging markets at ICBC Standard Bank said, referring to the time Asia, Russia and Brazil were recovering from the crisis waves of the late-1990s.

“Back then all the stars were aligned for globalization and emerging markets benefited the most. This time around, we just don’t have those multiple catalysts.”

The chief catalyst in 2001 was of course China. Its entry to the World Trade Organisation unleashed a decade-long export and investment miracle that propelled its economy from sixth place globally, to the world’s second biggest.

Its ascent hauled up much of the developing world, from Latin American exporters of soy and steel to the Asian workshops which became part of its gigantic factory supply chain. But its slowdown is whacking these countries equally hard.

Exports from emerging markets – from Korean cars to Chilean copper – are declining year-on-year at the sharpest rate since the 2008-09 crisis, according to UBS.

Global trade in fact likely grew slower than the world economy for the fourth straight year in 2015, according to the WTO, a United Nations body. That contrasts with previous decades when commerce expanded at least twice as fast as world growth.

The gloomy conclusion some are reaching is that the China effect was possibly a once-in-a-lifetime shift, whose effects are now dissipating forever.

“Rather than expecting emerging markets to mean-revert toward the golden years of 2002-2007, there is a risk that in terms of trade, what we are reverting to is the environment of 1980s,” UBS strategist Manik Narain said.

FLIGHT

One feature of the “golden years” was the extraordinary amount of capital that poured into the developing world; according to the Washington DC-based Institute of International Finance net inflows in 2001-2011 totaled nearly $3 trillion.

Some of this is starting to reverse as last year saw the first net capital outflow since 1988, a $540 billion loss, says the IIF which predicts more flight in 2016.

Other forecasters such as JPMorgan reckon nearly a trillion dollars have fled China alone since mid-2014; its central bank reserves alone declined more than $500 billion last year.

Redemptions from emerging stock and bond funds hit a record $60 billion last year, according to fund tracker EPFR Global.

IIF executive director Hung Tran says emerging markets’ problems are not just external. They must overcome a key homegrown issue – falling productivity.

Tran estimates productivity, which provides clues on future economic growth, is growing at just 0.9 percent a year across much of the developing world, a quarter the rate seen before 2007 and not far from richer countries’ 0.4 percent.

“Productivity advantage of EM countries, which is key for attracting capital flows and investment, has collapsed,” Tran said. “There is a cycle of diminishing returns on investment.”

SLOW-BURN CRISIS

There are some bright spots such as India and Mexico. But with China fears on the rise and Brazil and Russia in recession for the second straight year, investment returns across the sector are unlikely to recover soon, many fear.

Emerging stock market performance has lagged developed peers for five years now, and corporate earnings have shrunk for more than four years, Morgan Stanley has calculated.

This is the longest decline in the MSCI equity index’s history, MS says, noting the longest prior earnings recession in the asset class was after the 1997 crisis and lasted two years.

Richard House, head of EM debt at Standard Life Investments, notes the strengthening dollar is spooking investors in emerging currency bonds too.

“Fund performance hasn’t been good across the industry…Local market funds have been an outflow asset class for a while and that experience is going to impact people’s mindset going forward,” House said.

The fear of large-scale outflows is clearly on policymakers’ minds. To combat such an exodus, emerging economies may have to resort to radical measures such as coordinated securities market interventions, of the kind done in the West after 2008, Mexican central bank head Agustin Carstens has suggested

Ultimately though he said that to boost long-term growth, there was only one solution – tough economic reform.

(Reporting by Sujata Rao; Editing by Peter Graff)

U.S. stocks falter as oil fears spoil China enthusiasm

NEW YORK (Reuters) – U.S. stocks pared gains on Tuesday amid a renewed drop in oil prices, giving up most of an early rally that had been spurred by speculation of more stimulus efforts in China.

Stock markets from Asia to Europe, and initially on Wall Street, rallied to snap a rout this year in equities after Chinese gross domestic product data showed the slowest growth last year in a quarter century.

Shares in Europe rose more than 1 percent, while MSCI’s broadest index of Asia-Pacific shares outside Japan gained 1.6 percent. But gains on Wall Street were modest, and the Nasdaq closed slightly lower.

The market’s euphoria struck Simon Smith, chief economist at online brokerage FxPro, as odd given that weak GDP data are strange reasons to cheer China. Stimulus can only mean more interest rate cuts or reduced reserve requirements, which would weaken the Chinese currency further, he said.

“Most of the time developed markets have been happy to ignore and be totally uncorrelated to the China markets,” Smith said.

The major U.S. equity indexes faltered as crude prices traded below $29 a barrel. The International Energy Agency, which advises developed countries on energy policy, said the market should remain oversupplied this year and weaker prices could lie ahead.

The potential for oil to tumble further has scared investors as they’re reminded of the financial crisis in 2008 when many financial stocks cratered and their prices never recovered to former levels, Rick Meckler, president of hedge fund LibertyView Capital Management LLC in Jersey City, New Jersey.

“You’re just having this testing of what the bottom on energy is and no one knows the impact of a complete collapse the energy industry would have on U.S. equity prices,” he said, adding that people are afraid oil prices might collapse.

MSCI’s all-country world stock index rose 0.56 percent, paring gains of more than 1 percent. In Europe, the pan-regional FTSEurofirst 300 index closed 1.37-percent higher at 1,310.95.

On Wall Street, the Dow Jones industrial average closed up 27.94 points, or 0.17 percent, to 16,016.02. The S&P 500 rose 1 point, or 0.05 percent, to 1,881.33 and the Nasdaq Composite lost 11.47 points, or 0.26 percent, to 4,476.95.

Brent crude futures closed a touch higher, while the U.S. futures contract slid; their prices settled 30 cents apart. The U.S. contract did not settle on Monday, a U.S. holiday.

Brent crude futures rose 0.74 percent to settle at $28.76 a barrel. U.S. crude futures fell 3.26 percent to settle at $28.46. Earlier they had touched an intra-day high of $30.21.

Investor risk appetite initially improved on the expectation of further stimulus in China and rising prices for Brent, the global benchmark. Chinese oil demand likely hit a record in 2015, helping bolster the global oil benchmark.

The dollar index, which measures the greenback against six major trading currencies, pared most gains to trade 0.11 percent higher. The dollar added 0.22 percent against the Japanese currency, moving to 117.57 yen.

Against the euro, the dollar slipped 0.18 percent to $1.0909.

The benchmark U.S. Treasury note fell 5/32 to lift its yield to 2.0521 percent.

Top-rated German bond yields rose as investors favored riskier assets. The price of 10-year German bonds, viewed as a safe-haven in times of market turmoil, fell and its yield rose 1.5 basis points to 0.485 percent, off the day’s high just above 0.50 percent.

U.S. gold for February delivery fell $1.60 to settle at $1,089.10 an ounce.

(Reporting by Herbert Lash; Editing by James Dalgleish and Nick Zieminski)