Market Views For 2016 - page 2
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Reuters CRB Commodity Index Can Bottom In 2016
In this article, we will look at CRB Commodity Index. This is an important market to track overall direction on commodities. What we see on the weekly chart below is a five wave of decline within wave C, which means that the current weakness could be ending. Ideally market will turn up in 2016, but it can happen from around 28,00 or from next Fibo support at 25.00. If we are on the right track then grains, as well as oil and even gold can turn up as next year while USD trend may slow down because of negative correlation.
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Four Drivers of the Investment Climate in 2016
he broad interpretative framework we developed since late 2014, one that centers the de-synchronization of the major economies, will retain its usefulness into the New Year and beyond. The first phase of divergence was characterized by the Federal Reserve standing pat after winding down its open-ended asset purchase operations (QE3+), while many central banks from high income countries, including the eurozone, Japan, China, Canada, Australia, New Zealand, Sweden, and Norway eased policy.
Laying the Groundwork for 2016
With the Federal Reserve’s rate hike at the end of 2015, a new phase of divergence is at hand. It will be characterized by both Fed becoming less accommodative while other central banks maintain or extend current easing policies. Some central banks may have reached the end of their easing cycles, but it is possible that the door is not completely closed.
We expect the Obama dollar rally to continue in 2016. The premium one earns on US rates will continue to attract capital flows. Because of the wide, and widening interest rate differentials, one is paid to be long dollars. This has powerful implications for hedging. Dollar-based investors are paid to hedge exposure (receivables) in euros, Swiss franc, and Japanese yen for example.
Our assessment of indicative market prices suggests that the divergence meme, as much as it has been discussed, has not been discounted. By the time the ECB met in early December when it cut the deposit rate 10 bp to minus 30 bp and expand its program by six months (through March 2017), the premium the US offered over Germany for two-year borrowing had increased to nearly 140 bp. It was around 85 bp when the euro bottomed in March 2015.
The Fed funds futures strip suggests that the participants are skeptical about a second Fed rate hike in Q1 16. The Federal Reserve’s dot-plots suggest a majority of Fed officials think it would be appropriate. Several large investment houses, and Fitch, the rating agency, forecast a hike every quarter.
We recognize that the market is a great discounting mechanism. Arguably it has no rival for its ruthless ability to aggregate vast quantities of information. We have found it helpful in navigating the markets to appreciate that events can be anticipated and discounted. Buying rumors, selling facts is standard fare in the capital markets. However, conceptually, we think that the widening interest rate differentials cannot be fully discounted. The interest rate differentials, including the slopes of yield curves, provide powerful incentives driving new flows, influencing investment, hedging and liquidity decisions.
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Inflation will be the biggest economic story in 2016
The year 2016 will be all about inflation.
When the Federal Reserve raised interest rates on December 16 it did so with inflation running below its 2% target.
The latest "core" personal-consumption-expenditures reading, which excludes the more volatile costs of food and gas and is the Fed's preferred inflation reading, showed prices rose about 1.3% over the prior year in November.
The "core" consumer-price index, which is a more commonly cited reading on inflation — CPI weights shelter more heavily than PCE, among other differences — rose 2% in November, the highest reading since July 2012 and the latest piece of evidence that when you look past the deflationary influence of a strong US dollar and a collapse in commodity prices, inflation is perking up.
But headline inflation readings, or measures that include all prices including commodity inputs like oil and gas, have been flat this year, leading some to argue that deflation — rather than inflation — is the most clear and present economic danger.
This chart, however, shows the growing divergence between the two series and the major economic trend that will predominate in 2016: Inflation is coming.
Ahead of the Fed's rate-hike announcement, economists including Paul Krugman argued that the Fed ought to hold off raising rates in light of below-target inflation.
In a press conference last Wednesday, Fed Chair Janet Yellen made clear that the Fed believes inflation will return to its target over the "medium-term," though the Fed's own projections indicate that inflation may not return to these levels until 2018.
Now that the Fed has moved rates off 0%, the question becomes when does the next rate hike come? And then of course the one after that and so on.
The Fed's first rate hike came amid marked signs of improvement in the US labor market, though concerns about financial stability and the Fed's own telegraphing of this move certainly played a factor. In a way, the lack of inflation pressures needed to be overlooked to justify last week's action.
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Four global macro-themes for 2016 - Barclays
Barclays Capital outlines the following 4 global macro-themes for 2016:
Market watchers love to talk about clear ideas but keeping the themes in mind and seeing how they change and develop is the genesis of a great macro trade.
Theme 1: Developed markets will continue to grow steadily, but emerging markets remain weak
-Strong global consumer + trade/investment/manufacturing recession = mediocre but positive growth
Theme 2: Emerging Markets: still not sounding the all-clear
-The China slowdown - accrual accounting, not mark to market
-Broader ramifications - on EM and commodity countries
-Brazil - things should get worse before they get better
-Political dysfunction amid worsening economic and fiscal dynamics
Theme 3: The Fed lift-off cycle should proceed slowly as the Fed tests the limits of divergence
-But volatility regarding the Fed and China should increase as 2016 progresses
Theme 4: Poor liquidity has exacerbated market moves
-This is an ongoing theme that is likely to continue
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How to Be the Ultimate Contrarian Investor in 2016 It's hard to beat the crowd when you're a member of the herd.
To this end, we've compiled six ways investors can seek to escape the consensus Wall Street bubble by examining some of the more "out-of-the-box" calls for the year ahead. Be warned: It's difficult to be both different and profitable.
"Simple contrarian strategies can perform spectacularly well at big macro turning points, but they underperform the rest of the time," cautioned equity strategists at Citigroup led by Robert Buckland. "Most of the time it just makes you poor."
If your heart is still set on taking the road less traveled, here are the ways to do so in 2016:
From divergence to convergence
This year, Wall Street has been enthralled by the divergence trade—that is, the decoupling of the Federal Reserve from other major central banks and its subsequent effect on interest rate differentials and currency valuations.
But this theme may have been priced into financial markets too thoroughly when it comes to the U.S. and European Union, setting the stage for a convergence trade in 2016.
Count Deutsche Bank in the camp that considers the divergence theme near its best-before date.
"The end of 2015 is marked by the unusual combination of the Fed likely to tighten policy, while the [European Central Bank] delivered additional easing (albeit below heightened expectations)," wrote strategists led by Francis Yared in a report dated Dec. 10. "While this policy divergence could persist early in the year, there should be some partial convergence later in 2016."
"Using the Fed’s forecast of the U.S. unemployment rate and the ECB’s forecast of the euro area unemployment rate we are currently at peak divergence between the Fed and the ECB," added Torsten Sløk, Deutsche Bank's chief international economist, in a note published the following day.
Deutsche Bank's convergence trade recommendation is to buy 30-year U.S. Treasuries and sell German bunds of the same duration.
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4 Global Macro-Themes For 2016 - Barclays Barclays Capital outlines the following 4 global macro-themes for 2016:
Theme 1: DM will continue to grow steadily, but EM remains weak
-Strong global consumer + trade/investment/manufacturing recession = mediocre but positive growth
Theme 2: Emerging Markets: still not sounding the all-clear
-The China slowdown – accrual accounting, not mark to market
-Broader ramifications – on EM and commodity countries
-Brazil – things should get worse before they get better
-Political dysfunction amid worsening economic and fiscal dynamics
Theme 3: The Fed lift-off cycle should proceed slowly as the Fed tests the limits of divergence
-But volatility regarding the Fed and China should increase as 2016 progresses
Theme 4: Poor liquidity has exacerbated market moves
-This is an ongoing theme that is likely to continue
The great hope of the US economic recovery has been a flop One of the greatest hopes in the wake of the financial crisis was that there would be a surge in business investment, or capital expenditures (capex).
The case for a capex boom was simple and clear: Equipment was getting old, and central banks were making it very cheap to finance this spending.
But that story has been a flop.
For the most part, American businesses figured out how to make do with the equipment they had, and they incredibly managed to squeeze out higher profit margins even as their equipment continued to get older. And as for that cheap money, there's evidence that companies used at least some of it to finance share buybacks, thus boosting shareholder value through nothing but financial engineering.
"Capex should remain stagnant," Goldman Sachs' Sumana Manohar, Hugo Scott-Gall, and Megha Chaturvedi wrote.
To be clear, capex didn't fall to zero. In fact, it continues to be the biggest use of corporate cash. After all, you need to maintain the equipment you've got.
And to be fair to corporations, economic growth has been lackluster. And following the financial crisis, which caused financial strain for even the most financially robust companies, it's understandable why executives and managers have been chickening out when it comes to investing in big growth projects.
More recently, there was the crash in energy prices, and the energy industry accounts for the largest share of the capex spending that occurs in the US.
"A steep 25% decline in Energy capex as a result of low oil prices combined with weak sales growth due to a stronger dollar led to an 8% decline in aggregate 2015 capex," Goldman Sachs' David Kostin said in a November note to clients.
With energy prices remaining depressed and the dollar remaining strong, the risks appear tilted to the downside as far as capex spending is concerned.
But Kostin and his team are arguably optimistic here.
"We forecast Energy capex will drop by 20% in 2016 while S&P 500 capex excluding Energy will rise by 6%, resulting in overall S&P 500 capex growth of 1%," he said.
And so this discussion continues. Equipment continues to age while financing costs remain incredibly low. But global growth continues to be anemic, and oil has yet to find a bottom.
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Wall Street in 2016: What could possibly go wrong? By all rights, 2016 should be a good year for the U.S. stock market.
The Federal Reserve's recent rate hike signals confidence in the economy and presidential election years typically reward investors. Most experts are predicting a seventh year for the current bull market, with strategists in a recent poll expecting the Standard & Poor's 500 stock index to end 2016 at about 2,207, roughly 8 percent higher than it is now.
But a lot could go wrong. The same strategists have cataloged a long list of worries - everything from a destabilizing U.S. election to a meltdown far away - that could hit stocks hard.
Here is their laundry list of concerns. For those who'd rather stay optimistic, remember the old chestnut: Wall Street climbs a wall of worry.
COMPANIES MIGHT STOP EARNING PROFITS
Most of the 30 strategists polled by Reuters cited weak earnings as their prominent concern. With S&P earnings growth projected to be flat in 2015, stocks already are pricey. The market is trading at roughly 19.3 times trailing earnings, well above its 15 average. Any stumble in earnings would make stocks even pricier.
Thomson Reuters analysts now expect revenue to grow 3.9 percent in 2016, meaning any increases in costs could keep earnings flat for a second year in a row.
"If labor costs start moving up a bit and interest expense is moving up ... it's going to be hard to keep margins up," said Bob Doll, chief equity strategist at Nuveen Asset Management in Princeton, New Jersey.
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2016 FX Outlook: The Year The USD Peaked - Credit Agricole The tug of war between central bank policy divergence and global currency wars should continue to drive price action in G10 FX markets next year. The relatively strong domestic fundamentals in the US and the UK should allow the Fed, and to a degree the BoE, to tolerate further currency appreciation against low-yielding funding currencies like EUR, CHF and JPY.
With many positives in the price, we expect both USD and GBP to peak next year. In the case of USD NEER the peak should come towards the end of 2016 once the Fed tightening cycle is well underway. GBP should fare less well and we expect renewed weakness in H216 ahead of the EU referendum.
Policy divergence should keep EUR/USD and EUR/GBP under pressure. EUR should remain relatively more resilient against risk-correlated and commodity currencies as well as CHF and JPY. We expect EUR/USD to trade through recent lows in 2016 but parity is not our base case. The cyclical recovery in the Eurozone should accelerate and ultimately limit the scope for aggressive easing by the ECB, paving the way for a EUR rebound in late 2016 and 2017.
The risks to global growth and inflation should linger and prolong the global currency wars. Worries about China in combination with tighter global monetary conditions on the back of Fed tightening should continue to darken the outlook for G10 commodity and risk-correlated currencies. In that, we expect the antipodeans to underperform CAD and NOK. SEK should outperform but only once the Riksbank has declared an all clear on the risk of deflation later in 2016.
CHF and JPY should be the biggest underperformers in 2016. Persistent threats of deflation in Japan and Switzerland, as well as significant currency overvaluation in the case of the CHF, should mean the markets continue to bet on further BoJ and SNB easing. In addition, unhedged portfolio outflows from Japan and Switzerland could intensify as USD-hedging costs increase in tandem with US short-term rates. That should boost both USD/JPY and USD/CHF.
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IMF's Lagarde: 2016 Will Be Disappointing Global growth will be disappointing next year, Christine Lagarde, managing director of the International Monetary Fund, warned on Wednesday.
Writing for Germany's Handelsblatt newspaper, Lagarde said - again - that economic growth around the globe will be "a new mediocre, disappointing and uneven."
She also said that higher interest rates in the US and the economic slowdown in China will have the biggest spillover effect and therefore, will contribute to uncertainty with the biggest share.
Yet the normalization of US monetary policy and China’s transformation to a new, more sustainable growth model are necessary and healthy, she stressed. However, these steps must be done as efficiently and smoothly as possible.
Even the IMF’s latest World Economic Outlook (WEO) foresees lower global growth compared to last year, with a modest pickup in advanced economies and a slowing in emerging markets.
Growth is expected to post 3.6% of real GDP next year.