Here’s a look at some of the best and worst performing assets in global financial markets as 2016 ends.
British pounds are almost unanimously rated to be the worst performing currency in the year of 2016, which suffered significant devaluation due to the Brexit referendum on 23rd June, 2016. Overnight GBP plummeted, a price UK paid to “leave” the EU. By the end of the London trading session the next day, GBP dropped nearly 9% against the dollar, representing one of the largest single-session selloffs in GBP history. The ride for GBP in 2016 wasn’t a great one, though the value of GBP is expected to stay resilient until further details of Brexit will be revealed.
EUR/USD started with 1.0898 on January 4th 2016, but decreased to 1.0541 on December 30th, despite having achieved the peak of 1.1569 on May 3rd. The average EUR/USD of the year was 1.1062, but it could reach the parity in 2017 as Trump’s expansionary fiscal policies could further strengthen dollar.
With slower economic growth in China, Chinese RMB had its biggest annual loss this year since 1994, therefore the government ended 2016 introducing a new round of capital control measures to help RMB stay strong. The slowdown also weakened the value of Australian Dollar and New Zealand Dollar.
2016 has been a resurgence year for commodities, with the first annual advance since 2010. Thus, the Bloomberg Commodity Index, tracking returns for 22 components, climbed 11% in the past year.
Natural gas is on the biggest fourth-quarter rally in 16 years, prices grew 60% over this year, pushed by expectation of a severe winter. Wheat, on the other end of the spectrum, has been the worst performer tumbling 14% due to rising global stockpiles.
OPEC and 11 other producing countries plan to start oil supply cuts in the beginning of 2017 to reduce swelling global inventories after a long period of unlimited output. Details of agreement implementation are still awaited but oil has made the biggest annual gain since 2009. While economic growth of top user China and Donald Trump presidency, particularly his infrastructure investment plan, are expected to further bolster demand for metals in the coming year. For the first time in four years Goldman Sachs has recommended an overweight position for commodities, raising both iron ore and oil price forecasts. However, signals on the iron ore prices are mixed – plenty of other banks expect them to be back below $50 by the third quarter as Chinese property market may cool.
Trump’s victory had a detrimental effect on gold – it suffered a 13 percent decline in the fourth quarter of 2016, confirming the negative correlation between gold and U.S. stocks. After the dire end of the year, however, traders are once more bullish on gold as it climbs up 2.6% to 1173 an ounce the first week of 2017. Investors also hold bullish positions in cotton, cattle and crude oil, but aren’t optimistic for corn, cocoa and wheat. Overall, a modest recovery is projected for most commodities in 2017 as demand strengthens, supplies tighten and global economic growth picks up.
The year 2016 was a pretty good one for stocks despite political uncertainty coming from Brexit, Trump, and new elections happening across Europe. In UK, The FTSE 100 broke an all-time high on the final trading day of 2016. In the US, the S&P 500 was up over 10% across the year, the return was 12.5% including dividends. That followed the weak performance of 2015, when the index gained just 1.4%. The beginning of the year was challenging for American stocks, when they have experienced a selloff, driving the Dow Jones industrials at 15,500(now 19.970). However, potential Trump’s expansive fiscal policy and a bounce in commodity prices have been key drivers for markets, offsetting the initial tumble. US banks are expected to boost earnings as a result of higher Treasury yields and a more accommodative regulatory regime promised by the Trump administration. The best performing sectors of the S&P 500 were Energy with a +24% return and Financials with a gain of +20%.
While other developed equity markets mostly struggled in 2016. Europe was hit by Britain’s vote in June to leave the European Union and the European Stoxx 600 was down 1.2%. Despite 2016 was the fifth successive annual gain for the Japan’s Nikkei 225, the index was only up 0.5%, partially due to weak inflationary and macroeconomic data signaling a weakening effectiveness of BoJ monetary policies.
The best stock index of the year (in terms of U.S. dollar) was the Brazil’s Ibovespa, driven by the new President Michel Temer replacing Dilma Rousseff after the impeachment, and rising commodity prices. The Shanghai Composite index was the worst (-16%), however it was down -23% at the beginning of 2016, due to an initial loss of confidence in China’s economic growth prospects. The falling yuan has driven investors abroad in search of better performance elsewhere.
2016 was a volatile year for government bonds starting with the immigration crisis, followed by Brexit, Trump’s winning and ending with the veto vote in Italy’s constitutional referendum. U.S. Aggregate Bond Index finished with 1.9% in the closing days of 2016 with the expectation of an increase of US treasury yield accelerated after election results on November 8th, the spread between US 10-year Treasuries and German 10-year Bund widened to 2.224%, marking the widest gap since the fall of the Berlin Wall. The gap signals that investors see strong divergence of economic growth in these two developed markets. Across the Pacific Ocean, China’s 10-year government bond yield has fallen from 4.6% in January 2014 to 2.65% in October 2016, one of the lowest points this year, despite the government’s efforts to contain the bond bubble.
Luca Cartechini – Head of Financial Markets
Yiping Zhang – Financial Markets Associate
Kseniya Shitova – Financial Markets Associate