2016 RECAP

WORST START EVER, TO BREXIT, TO NOV. 8th

  • U.S. equity markets topped the charts.

 

  • Sovereign bond yields touched record lows at mid-year. In the U.S., a sharp reversal late – mirror-image of stocks. The 10-year Treasury note topped 2.6% in Q4, highest in 2 years.

 

  • Fed moved a 2nd time. Forecasts 3 hikes 2017 – surprised markets.

 

  • Europe & Japanese equities: abysmal 1st-half, recovered 2nd-half Trailed the U.S. in 2016

 

  • U.S. dollar index at a 14-year high. WTI +45%, Gold +8%.

 

 

 
 

 

From the worst start ever to an electrifying presidential election. A year of extremes. Markets opened 2016 sharply lower. A collection of factors collided, from China’s slowdown reaching U.S. shores to oil prices collapsing on weak global demand. Meantime, bond and gold prices moved higher. The tone was set for the first 6 weeks. Of all the above, crude oil’s $10 decline (more than 20%), was the catalyst. It was oil’s rebound in the 2nd-half of Q1 that turned the tables on extreme pessimism. On cue, the turnaround lifted U.S. equity prices. Amazingly, a stock market correction (a decline of more than ten-percent) reversed – 180 degree turn – by quarter-end.

During those opening 90 days, Treasury paper was in high demand. The yield on the benchmark note dropped below 2% quickly, a level it would not crossover until much later in the year. Near the end of a tumultuous first quarter the Federal Reserve met and decided to shelve its plan to quickly normalize short-term interest rates. The central bank entered 2016 with ambitious plans: to raise the funds rate 4 times, therefore hiking overnight funds 100 basis points after increasing the rate only once in the previous decade. A complete change of pace that did not come to pass!

Gold had its own story to tell. After declining for a number of years – following the Euro debt crisis – the Midas metal regained its touch. Bullion prices shot up 20%, crossing two big round numbers on its ascent. At its lowest 2016 price, gold was at its lowest since 2009, in the aftermath of the financial crisis. The foreign exchange markets were mixed. The U.S. dollar opened 2016 strong against the euro but weak versus the yen. EM currencies suffered early-on before stabilizing at multi-year lows. It is worth noting that EM markets (beyond the currencies) rebounded well ahead of developed markets. A harbinger of investment trends to come in Q2.

Springtime was the flip-side of winter with all the high drama saved for the tail-end. Q2 opened with a flourish, everything worked! Stock prices moved higher, as did oil prices, while bonds and the dollar held their ground, trading sideways the bulk of the three-month period. It was a risk-on quarter until the end. In the final week came the first of two major surprises at the voting booth. In a referendum, Britain opted-out of remaining a member of the European Union. So after a more than a forty-year partnership on economic and political accords, the U.K. has embarked on a two-year odyssey to go their own way. Of course, Article 50, the official document that allows for a full break has yet to be invoked, and according to the High Court needs to be ratified by Parliament. At year-end, the assumption based on the prime minister’s words was that the trigger date will be exercised by the end of Q1 2017.

Brexit turned out to be a brief moment. Markets swooned for three days before the start of Q3, and then it was over! Risk-off switched to risk-on as soon as the event did not appear to be a systemic risk. This time U.S. stocks were not the only beneficiaries as Europe and Japan saw equity markets rise as well. As a matter of fact, summer months saw Japan boomerang from a double-digit loss to a double-digit gain. In Europe, equity indices narrowed the underperformance gap. Meanwhile fixed income marked a historic quarter.

 

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