Year in review: looking back on an eventful 2016

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Three sets of dominant factors shaped the financial markets in 2016: 1. Leading central banks and their monetary policies, 2. Uncertainty over the economic outlook and oil price trends, 3. Political events in the shape of elections and referendums.

The incoming president Donald Trump is expected to launch fiscal stimulus policies and so provide an extra boost to the economy. Ben Steinebach Ben Steinebach Head of Investment Strategy

First, the US Federal Reserve mostly kept its interest rate powder dry throughout the year, after an initial rate rise in December 2015 – the first in nine and a half years. Its main reasons for doing so were turmoil in the global financial markets at the start of 2016 and geopolitical vicissitudes in the remainder of the year. A second hike did not materialise until December 2016. Meanwhile, the European Central Bank (ECB) continued its expansionary policies and widened its asset purchase programme to include more bonds, increasing monthly purchases to €80 billion and reducing interest rates a little further. In December, it resolved to extend the programme to the end of 2017 but to cut monthly purchases to €60 billion.

The second set of factors started off with concerns over the strength of the Chinese economy at the beginning of the year and quickly morphed into doubts about other parts of the global economy, including the US. Continued oil price falls in January – to below $28 a barrel – were initially reckoned to benefit purchasing power but soon turned out to be a drag on the global economy through their negative effects on the oil and oil-related sectors. At the end of the day, however, full 2016 can be concluded to have developed satisfactorily and even to have improved in the second half. That said, corporate earnings growth remained very subdued.

Lastly, political events caused a fog of uncertainty to descend on the financial markets in the year that was. A deep sense of discontent across large swathes of the Western population fanned fears of rapidly growing support for populist parties and movements. The first sign to emerge was the advisory referendum vote in the Netherlands on the European Union’s association treaty with Ukraine. Confounding all expectations, the British subsequently voted for Brexit, the United States voted in Donald Trump as the country’s next president and Italy saw prime minister Matteo Renzi step down after losing the country’s referendum on constitutional reforms. The run-ups to these plebiscites were typically marked by risk aversion pushing down equity prices and capital market yields. As soon as the dust had settled, investors went back to business as usual and saw a reversal in market fortunes.

Impact on the financial markets

Not until Donald Trump was elected and investors started to realise that his proposed policies might well encourage growth and inflation did capital market rates shoot up and equity markets reach new all-time highs. After 8 November, US ten-year yields added 0.7% to 2.5%, with Europe and Japan enjoying a rather more limited upturn of around 0.1%, albeit that negative returns were wiped off traders’ screens in both Japan and Germany. The growing spread in the final months of the year put significant pressure on the euro relative to the US dollar. In the face of strong yield increases, the country’s key equity indices achieved fresh all-time highs, while most stock markets in Europe recorded numbers that had not been seen in the year.

Better shape

In investment terms, the world is in better shape at the start of 2017 than it was a year earlier. Still, we expect a persistence of many of the investment themes that dominated the second half of 2016. 

On the back of improvements in the United States, the global economy has been on the mend since the summer, and we expect it to grow by around 3.4% in 2017. Manufacturing confidence, which is a good gauge of economic growth, has been recording a broad-based upturn in the past couple of months. Confidence levels may not exactly be flashing up very robust growth, but they do point to growth. 

The incoming president Donald Trump is expected to launch fiscal stimulus policies and so provide an extra boost to the economy. 

However, the outlook isn’t all roses – there are definite risks. Elections in several European countries – the Netherlands, Germany and France – may see a further shift to the populist right, getting in the way of European reforms and ushering in a more inward-looking and protectionist policy regime. The other big question is to what extent President Trump will prove to be a protectionist. 

Central bank policies should diverge even more, with Europe’s and Japan’s central banks expected to keep their monetary stimulus programmes in place while the US Federal Reserve is likely to raise interest rates further – with the speed and number of hikes set to influence market sentiment. The markets are currently pricing in two more rate increases for 2017.

Deluge of key macroeconomic data due out in first week of 2017

The first week of the year will bring a veritable deluge of key macroeconomic data, with a raft of countries set to report their industrial confidence figures for both the manufacturing and services industries. The minutes of the Federal Open Market Committee (FOMC), the Federal Reserve’s monetary policy committee, are slated to be published mid-week, as are inflation figures for Europe. Key US employment data will hit the markets on Friday. 

The results season won’t get underway until the second week of January, but Monsanto and Samsung Electronics are due to publish results for their non-calendar financial year this coming week. Incidentally, S&P500 corporations are expected to return fourth-quarter revenue and earnings growth at over 5%, while news agency Bloomberg puts the consensus for the Euro Stoxx600 at 24-26 percent. 

We wish you a wonderful New Year’s Eve and a happy and prosperous 2017.


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