Extreme volatility across the Board

It has been a rocky start of 2016, as the latest events in Asia suggest a tough year ahead for financial markets. China was once again at the focal point of the storm after the People Bank of China devalued the Yuan, fixing it at its lowest level since 2011.The Chinese stock market sell-off came as weakening of the Yuan led to worries that the Chinese economy was slowing more than expected.

Throughout last week, China’s new stock market circuit breaker suspension triggered twice, a mechanism which automatically halts trading in stock markets a whole day if it drops to 7% or below. After weighing advantages and disadvantages of the new circuit breaker system by the end of the week, China’s Securities Regulatory Commission decided to suspend the newly implemented mechanism to protect investors and calm markets.

The dollar index started the week at 98.74 then dropped to a low of 98.04 after worse than expected manufacturing data. On Friday, the index strengthened broadly after the US Labor Department said the economy added 292.000 jobs in December, beating expectations for a rise of 200.000. However, the rally was short lived as the currency fell back again to close near its weekly lows of 98.377.

The Euro started the week at 1.0856 then dropped to 1.0709 marking its lowest level in more than one month, after China reported weaker than expected manufacturing data in December sparking fresh concerns of slowing growth in the economy. By the end of the week, the Euro recovered and rallied back to 1.0933, after the Eurostat reported that unemployment rate in the euro area fell to the lowest level in more than four years in November, dropping to 10.5% from 10.6% in October.

After reaching a high of 1.4812, the Sterling Pound dropped throughout the week, reaching a five and a half year low of 1.4504. The drop came after manufacturing purchasing managers' index dropped to a three-month low of 51.9 from 52.5 in November, underlining signs that the economy is slowing in the fourth quarter. The Pound closed the week at 1.4517.

The Yen opened the week at the 121.27, rising sharply reaching a three-month high of 117.47 as weaker Chinese economic data and concerns over a possible geopolitical issue boosted safe haven demand for the Yen. The Yen closed the week at 117.44.

In the commodities world, oil prices continued their prolonged slide reaching their lowest level in twelve years. Crude has tumbled by more than 30% since OPEC held its production ceiling at 30 million barrels per day last November in an apparent effort by Saudi Arabia to squeeze out shale producers in order to maintain market share.

US ISM Manufacturing PMI Contracts

In the US, economic activity in the manufacturing sector contracted in December for the second consecutive month as lower oil prices undercut spending in the energy sector while construction-spending fell in November for the first time in nearly 1-1/2 years. The data suggested the economy ended 2015 with less momentum. The Institute for Supply Management also said its index of national factory activity fell to 48.2 from 48.6 the month before. The reading was just below economist expectations of 49.

Trade Balance Narrows in the US

The US trade deficit narrowed in November as efforts by businesses to reduce excess inventories pushed imports of goods to their lowest level in nearly five years, outpacing a drop in exports. The Commerce Department said the trade gap fell 5.0 % to 42.4 billion US dollars. Lower oil prices as well as increased domestic energy production also helped to control the import bill. The price of petroleum averaged 39.24 dollars per barrel in November. That was the lowest level since February 2009 and down from 40.12 dollars in October and 82.92 dollars in November 2014.

FOMC Meeting Minutes

Minutes of the Federal Open Market Committee’s Dec. 15-16 meeting, released last week, showed almost all FOMC participants were now satisfied that the committee’s criteria for beginning the policy normalization process had been met. The minutes listed a number of justifications for the Fed to proceed gradually. Moving slowly would keep policy sufficiently accommodative to continue supporting the labor market and put upward pressure on inflation. It would also allow members to “assess how the economy was responding to increases in interest rates.” Prices in federal funds futures contracts suggest investors see zero chance of a rate increase when the FOMC next convenes on Jan. 26-27. Odds of a rate hike in March rose to 40.6 %, based on the assumption that the effective fed funds rate will reach 0.625 % after another increase.

Europe & UK

Euro-Area CPI Flash Estimate Unchanged

The Euro zone inflation rose at a slower than expected rate in December. Indeed, the annual rate of inflation rose just 0.2%, matching November’s reading and falling short of forecasts for an increase of 0.3%. Lower energy costs were the largest factor contributing to low inflation, with annual energy costs down 5.9%. The data add to the pressure on the ECB to act further to boost the struggling Euro area economy.

Euro Zone Unemployment Rate Improves

Unemployment rate fell to the lowest level in more than four years in November, fueling optimism over the health of the region's economy. In a report released last week, Eurostat said unemployment rate fell to a seasonally adjusted 10.5% from 10.6% in October. This is the lowest rate recorded in the euro area since October 2011. Analysts had expected the jobless rate to inch up to 10.7% in November.

UK Construction PMI and Service PMI Improves   

In the UK, the Construction Purchasing Managers’ Index registered 57.8 in December, up from a seven-month low of 55.3 in November. Commercial building was the main engine of growth, with this area of activity expanding at the strongest pace since autumn 2014. Also, the UK service sector growth stabilized in December, according to the latest PMI survey.

Total activity rose at a strong overall rate, supported by a sharp rise in new business. The senior economist at Markit, which compile the survey, stated “The services sector remained the key driver of the UK’s economic upturn in December, helping to offset the recent weakness seen in manufacturing and putting the economy on the starting block for another year of 2-2.5% growth in 2016.”

China

China’s Manufacturing PMI Drops

China's factory activity shrank for a 10th straight month in December due to lack of external demand. Manufacturing Purchasing Managers' Index dropped to 48.2 in December, below market forecasts of 49.0 and down from November's 48.6.That was the lowest reading since September and well below the 50 level.

China’s Service PMI drops

China's services sector expanded at its slowest rate in seventeen month in December, indicating that the world's second-largest economy may be losing steam. The Purchasing Managers' Index fell to 50.2 in December from 51.2 in November. The reading was the lowest since July 2014 and the second lowest since data collection began in late 2005.

Kuwait

Kuwaiti Dinar at 0.30340

The USDKWD opened at 0.30340 on Sunday morning.

Rates – 10^th January, 2016