Finance Friday 8.1.2016

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finance fridayDi Nikola Kedhi

Unease, anxiety and volatility characterized the outgoing year. 2016 was eagerly anticipated by most market participants. However, as the first day of trading for the year demonstrated, there are currently few financial havens left for investors. Will 2016 be at least more stable, or will the rest of the year be as dreadful as its first day?

Monday started with a massive selloff in Chinese markets, which caused the CSI 300 Index to fall by 7%. Other markets quickly joined the decline. Dow Jones decreased by 1.09%, S&P 500 lost 1.15%, whereas the European Stoxx 600 closed the day 2.5% down. All this was a reaction to weak manufacturing data from China. Will this be the new normal for the year? Definitely not! However, this does not mean that all the problems will disappear as the year unfolds. Uncertainty is here to stay, mostly fueled by geopolitical instability and China’s unsteady financial situation.

According to a survey compiled by Bloomberg, the Stoxx 600 Index will increase 16% during this year. Commerzbank AG — known for its accuracy in predicting the Index’s movements — estimates an 18% increase. This does not come as a surprise considering European stocks are among the most attractive right now. The rate increase in the US is likely to drive American investors towards European markets. The ECB has made it clear that quantitative easing will continue until inflation reaches its 2% target. The data for December shows that inflation (0.2%) is still far away from the desired level. Thus, European stocks are highly likely to experience a better year than the last one, unless the worrying situation in Asia deteriorates more rapidly than predicted.

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China has been the source of much of last year’s trouble. The way markets opened the first day of this week is the best representation of 2015. China’s economic data is disappointing and this leads to a global panic, which is translated into a massive selloff in the markets. Then the Chinese government tries to breathe life into Chinese markets so they can start to look normal once more — until it all begins again. This is a known status quo now and investors are starting to adapt to this situation. They have experienced huge losses as a result of the instability in China so in the future they will be more careful. That is why although China’s problems will still be there, the other markets will become less affected by it.

Chinese economy has been slowing for quite some time now. The effects of this slowdown are being felt globally. There is a decrease in global demand, which has led to falling commodity and energy prices. Yet, it is highly improbable that there will be a collapse in Chinese economy — at least in 2016.
On the other side of the Atlantic, the US faces another uncertainty. Will the economy remain strong enough to withstand future rate hikes? According to analysts from Goldman Sachs, the S&P 500 will finish this year flat, at the 2100 level. Their estimates show that earnings will increase 10% and companies with strong balance sheets will outperform in a rising rates environment. Inflation continuous to remain at low levels and will be closely monitored by the Fed. The rates will probably rise during the year, however there will be no more than two increases. Although the US is in its 6th year of expansion, Global economy is still in a fragile state. Thus, the Fed will try to be cautious about proceeding with further tightening. The presidential elections will be another important event of the year, which will certainly have an impact on the markets.

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From the geopolitical perspective, the situation will not improve in the near future. Tensions in the Middle-East, Russia, South China Sea and the migrant crisis in Europe will definitely be present like they were last year. Stock markets will experience declines as a result of geopolitics, but such drops will not be long-term.

2016 started with a bang: if anything, it will unquestionably be an eventful year.

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Articles written by the various members of our team.

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