2016 HERE WE COME - KARIM GHAIDAN


2015 OVERVIEW AND WHAT WE EXPECT 2016 TO BRING

This is a long piece. It looks at the key events that moved the asset classes we follow in 2015 and then tries to analyse where the money making opportunities lie in 2016.
I t has a lot of graphs which hopefully help explain my text.

2015 SUMMARY

Risk was little changed.
The S&P500 closed 2015 virtually unchanged from its 2014 close of 2,058.90. The last time the benchmark averaged finished the year flat was 2011. European markets ended the year mixed. Germany's DAX gained 10%, while Italy's MIB was the top performer, up 13%. On the downside, Britain's FTSE lost 5% and Spain's IBEX fell 7%.The major Asian indexes were mostly higher. China's Shanghai Composite and Japan's Nikkei each gained 9%. Hong Kong's Hang Seng lagged, losing 7%.

US Treasury’s fell.
Treasury yields put in their lows and hence their highs in price for the year in January.
At the short end of the yield curve the two year yield rose to fresh six year highs after the FED announced its interest rate hike in December. For the year, the two year rallied 60 basis points to 1.07%.
The 10 year yield put in its 2015 high of 2.48% in June before ending the year up 43 basis points at 2.29%.
Selling at the long end caused the 30 year yield to rise 28 basis points to 3.03%. The yield on the long bond put in its 2015 peak of 3.24% in June.

The USD rallied.
The USD Index climbed 9% in 2015.
The CAN$ was the worst performing major currency versus the USD, falling 16.4% as a result of the general weakness in commodities especially crude.
The EURO was also hit, falling 10% as the ECB announced a policy of negative interest rates.
The CHF was the only major currency to briefly gain versus the USD. In January, the Swiss National Bank removed its EURO/CHF floor, causing the CHF to fly. The SWF rose by 16%. By the middle of March the move had been erased.

Commodities had a bad year.
Precious metals saw some early strength in 2015 but sold off throughout the year after their initial gains. Gold fell 10% and silver12%.
On the industrial side, copper collapsed 25%.
Energy was particularly badly affected. Crude tumbled 31%.
 
2015 DETAIL

After seven years of 0%, the FED finally increased interest rates by 0.25% in December.
 Remarkably, they did so against a backdrop of easing by virtually every other major global central bank. Australia, Canada, China, Denmark, India, Indonesia, Norway, Russia, South Korea, Sweden, Switzerland, Turkey and the ECB all cut rates in 2015.
The ECB moved further into negative territory in early December, just weeks before the FED hike.
Draghi also announced an extension of the QE program he started earlier in the year. With US QE over, the FED’s balance sheet has stopped growing as it buys less debt from the market whilst the balance sheets of both the ECB and BOJ continue to expand.
 
 

 
 
The difference in monetary policy between the US and the rest of the world had pronounced effects throughout the financial markets.

BONDS
Yields hit all-time lows in Europe throughout the year whilst US rates hit multi year highs throughout the year. With similar rates of inflation and growth, the spread between US and German yields grew very wide and had a great impact on currency markets.
 
USD
The combination of FED tightening, global easing, and a commodities crash was a powerful force in driving every currency in the world lower against the USD.
This sharp decline in global currencies versus the U.S. dollar impacted US manufacturing, earnings of multi-nationals, and commodities.
 
 
NO DECOUPLING
The consensus at the start of the year was that US economic growth was going to finally breakout in 2015 with a decoupling from the world. The opposite was true with manufacturing and industrial production in the US declining to recessionary levels.

US CORPORATE REVENUES and EARNINGS
The consensus was for US corporate earnings to expand double digits with stronger revenue growth. The combination of a stronger USD (bad for exports), weaker Crude (bad for energy companies) and lower overall economic growth was underestimated and the complete opposite was true.
S&P 500 earnings have now declined for four consecutive quarters while revenues have declined for three straight quarters.
 
 
 
COMMODITIES
The rise in the USD, slowing global growth and increased supply all contributed to the third consecutive down year for commodities. Many commodities hit multi year lows in 2015 with dramatic declines from their all time highs.