Financial Themes – Q1 Important Facts
2016 is shaping out to be an interesting year in the financial markets. A lot has happened in the last 3 months which is partly an extension of what happened in 2015. From the negative interest rate regime in Japan to the increased stimulus package for Euro area, investors and traders have witnessed some of the most interesting times in the market. Remember that the year started on a rather volatile manner with the Chinese market falling for more than 7% within one trading day thus triggering a circuit breaker. So far, the interventions made by the Chinese government have worked pretty well and we have seen some recovery. In the next few paragraphs, the key issues to be witnessed in the second quarter will be looked at.
Financial Themes – Oil’s main producers meet
The quarter begins on a relatively volatile tone where a single newswire can lead to major market moves. As we have experienced in the first quarter, global markets (particularly in the United States) have moved in the same direction as the oil prices. When oil goes up, indices such as S&P have also rallied and vice versa. Therefore, the upcoming meeting by the key oil producers will mean a lot for the global markets. If the oil producers agree on oil cuts, then we anticipate that we will have a relatively bullish second quarter. However, going by the recent comments and remarks by Saudi Arabia and Iran, chances are really low that there will be a deal.
Financial Themes – Brexit
Following the re-election of David Cameron in 2015, he promised to offer the UK residents a chance to choose whether they wanted to remain in the Euro area or not. This culminated into what is now known as the Brexit referendum which is scheduled for June. This will be a major theme that cannot be wished away in this quarter. This was evident a few weeks ago when the influential London mayor, Boris Johnson announced that he would support a Brexit. After the announcement, the pound shed more than 2% to the dollar. It will be interesting how the referendum will turn out.
Financial Themes – Global Monetary Divergence
As we stated in the first quarter’s review, divergence in monetary policy among the main financial centers of the world continued in the first quarter. While the United States kept the rates constant in the quarter, we saw interesting happenings in Japan which entered a negative interest rates category. In Europe, Mario Draghi and his committee found it wise to increase their stimulus while leaving interest rates low. In the coming quarter, we will witness another period of monetary policy divergence. Recently, the United States released encouraging employment numbers which might lead to another tightening this quarter. Also, as a result of these monetary issues, currencies such as Euro that lost ground in 2015 have achieved significant recovery while the dollar has become weaker. In addition, India has just cut its policy rate to 6.5%.
Financial Themes – Emerging markers
In 2015, the emerging market economies were slowed down by a series of factors such as a strong dollar and reduced commodity prices. The dollar gained significantly against the major emerging market countries leading to an interesting period. Commodities (which these countries export) became incredibly cheap. In the first quarter, we saw major commodities recovering. To date, oil has went up by approximately 12% while gold has gained by more than 10%. Some have argued that this recovery is merely a correction that has no intrinsic values. Therefore, it will be interesting to see what will happen in the quarter.
Financial Themes – China
In the 1Q review, I looked at 4 Cs that will be the key pointers in the first quarter. They were: Crude, Currencies, Corporate Profits, and China. China remains a key country to watch in this quarter. The numbers released in the last quarter showed a continued downward spiral. The World Bank forecast on the Chinese economy growth of 7% which we anticipate to be revised downwards because of the recently released numbers where industrial sector has slowed. The service sector that China intends to become has also not achieved that growth. Therefore, it will be interesting to see how the Chinese economy fares since this will be a key determinant of what happens in the broader global economy.