2016 has been a tumultuous year with many all-time highs and lows of the stock markets all happening within this same eventful year.
If you are still skeptical, here are some statistics – 2016 saw the US dollar reaching its peak in 14 years and the Yuan plunging to its lowest in 8.5 years. Yet, these are the only few headlines-making market swings this year. In this last issue of the year, let us review the major events of 2016 that created great turbulence in our financial markets.
Chinese Markets Crash
First on the list, and coincidentally also the first event chronologically, would be the Chinese markets crash in January 2016. People around the world were happily welcoming the new year with open arms, but it was the exact opposite for investors who faced a dreadful start in the markets.
On the first day of the year when many had expected an auspicious start, the trading desks in China were experiencing an unforeseen chaos. Investors were fighting to sell off their assets, creating a huge plunge in the Shanghai Composite Index by 6.9%. The Chinese would never have expected that their circuit breakers would come in handy on the first day of use as it shut down the markets and barred all transactions.
This turbulence rippled across the global markets instantly. In US, the Dow Jones Index fell by 1,437 points, S&P 500 Index tumbled by 2.3% and NASDAQ Index plummeted by 2.7%. In Europe, Germany’s DAX Index dropped by 4.3%, Britain’s FTSE 100 Index 2.4% and France’s CAC 40 Index 2.5%. In barely 2 weeks, the stock markets around the world lost more than $4 trillion.
Strong evidence supporting the slowing down of the Chinese economy sparked pessimism amongst investors and was exacerbated by the depreciating Yuan, all of which prompted the selloff. The installation of the circuit breakers which hinted at the possible withdrawal of support that props up the market, did not help in the situation either.
Our article early this year also analysed the event. Could this market crash be an isolated event this year? Economist Andrew Smithers who is known to accurately predict economic events thinks otherwise. He cautioned that “U.S. stocks are now about 80% overvalued,” and a stock market crash could be imminent in 2017.
Britain’s decision to leave the European Union, more commonly known as Brexit, would definitely be one of the major events this year. On 23 June 2016, 51.9% of the Britains voted YES and led their country out of the 23 year old country union.
This decision is a result of the pent up frustrations regarding how the European Union functions. The Britains do not see the purpose in sending money to Brussels to be redistributed to other underperforming countries. Neither are they very understanding towards the social problems brought about by the large influx of immigrants into UK. It seems like even the then-Prime Minister, David Cameron could not mediate the situation.
While Brexit is one of the black swan events that took the world by shock, it certainly is not the last of the exit-EU-series. More recently in Italy, Renzi lost the referendum and the opposition party that is known to be a strong advocate of leaving EU, is expected to make huge gains in the re-elections. Whether Italy have their very own Brexit is probably another hot topic in 2017.
OPEC Oil Cut
Third on the list of major market-shaking events is the oil supply cut decision by Organization of the Petroleum Exporting Countries (OPEC).
Oil prices have remained low because of overproduction and major producers have been bearing the brunt of low oil sales revenue, especially in recent years. According to the US Energy Information Administration, OPEC would only earn $341 billion of oil revenue this year, a stark contrast to $753 billion in 2014 and $920 billion in 2012.
However, the turning point came this year. On 30th November 2016, OPEC publicly announced its decision that its 14 member countries would work together to reduce their oil production for the very first time since the 2008 Global Financial Crisis. The group is also working with non-OPEC countries who would further cut their supply by 600,000 barrels a day.
Immediately after the announcement, Brent crude prices soared by about 8% and traded at approximately $50.12 per barrel while the West Texas Intermediate (WTI) price increased by about the same amount and traded at about $48.97 a barrel.
However, it is not certain that this oil price increase would continue into the new year. The basic demand and supply trends are not favourable. Alternative oil sources have emerged because of fracking, most notably from the US and have created significant supply. Also, the middle class have cut back on their energy consumption in recent years for fear of recessions and market fluctuations. Furthermore, according to analysts, OPEC members do not usually keep to their pact as seen in previous agreements to cut oil production. Hence it remains to be seen if oil prices would continue its bullish rise.
Arguably, the most prominent elections this year would be the US Presidential elections.
Extensive analysis and polls were conducted, and a lot of attention was concentrated on the movements of the stock markets as investors hedge and find opportunities.
As the two presidential election candidates had very differing views and suggested policies, the US and global economy faced a great deal of uncertainty. On the night of the elections, 8th November 2016, the Dow Jones Index decreased by more than 800 points. The S&P 500 Futures also went down by 5%.
However the downward trend did not persist for long. Markets quickly rebounded as investors began pouring money into the US economy following Trump’s promises for large tax cuts and massive government expenditures. Within a day, the Dow Jones Index shot up by 257 points to 18,589 while the NASDAQ increased by 58 points to 5,258.
Rising consumer and investor confidence continue to back the growth of the US economy, pushing the greenback to its highest in 14 years but at the same time raising fears about inflation in the US.
Yet, it is still unclear how Trump would play out his foreign policy with the world’s major economies, most notably China that it is currently at odds with.
Federal Rate Hikes
On 14th December 2016, Janet Yellen the chairman of the U.S. Federal Reserve, announced the Federal rate hikes as expected by investors worldwide.
Since the 2008 crisis, the Fed has maintained an expansionary monetary policy and a near-zero interest rates to boost growth. This rate hike is only the second since then. The main reason why the Fed has adopted a sudden change in stance is to relieve the inflationary pressures led by Trump’s economic policies, also commonly known as Trumpflation.
“I would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment,” Yellen said. She believes that the US economy is doing fairly well and the aggressive expansionary fiscal policies would only lead to a widespread inflation in the world’s largest economy. As such, the rate hikes, a form of contractionary monetary policy serves to calm the economy down to prevent consumer prices from soaring.
While the stock fluctuations are relatively smaller as compared to the previous events covered in this article, what might create a larger impact is potentially the additional 3 rate hikes next year.
A Year of Market Swings
Year 2016 has been a fairly exciting year for investors worldwide with the highs and lows taking the headlines every now and then. Bloomberg analysts however predict another volatile year ahead especially because the major events of 2016 do not end just in this year and will have large implications on how the markets would perform in 2017.
This might be the time where stock monitoring apps like Call Levels would be extremely useful. It has even saved people from heart attacks.
If you want to improve returns on your equity investments by leveraging the power of market monitoring and real-time alerts, download Call Levels: