The New Year started with significant market declines. While indices such as the DAX, the SMI and the Dow Jones lost up to 5 - 6 %, oil markets were distorted even stronger with Brent crude declining 20%. There are several reasons for those movements. Here are a few factors that will be important in 2016 (and beyond):
Above all, China is the major cause for concern. To counteract a slowing economy the central government of China has already intervened several times. The latest interventions were the devaluation of the Renminbi and the automated suspension of equity trading (if daily losses exceed 7 %). At least the latter measure has been undone. Next to the economic risks, the main risk is a loss of trust in the abilities of the central government to bring the situation under control. As for the rest of Asia, a further devaluation of the Renminbi will be affecting the competitiveness of other countries, which in turn could lead into a currency war.
Near- and Middle East
The situation in the Middle East remains extremely tense. The Syrian conflict and the spread of the IS have forced the international alliance for military interventions. The (for now) dissolved nuclear conflict with Iran and the consequent lifting of economic sanctions is, however, letting the tensions between Iran and Saudi Arabia grow over the supremacy in that region. An escalation would be reflected directly in the oil markets and consequently other financial markets.
Both, the economic- and the refugee crisis will shape the year in Europe. At the first glance the crisis in the southern European countries seems to be under control. The political shift to the right, which is also due to the refugee issues, could bring the crisis back on the agenda though as the solidity of the Eurozone will be questioned. A possible BREXIT in 2017 and above all further action by the ECB shall be moving the market.
The question of how the FED will proceed on their interest rate policy will occupy us at first. In yesterday’s Beige Book report, the Fed stated that the decline in oil prices and the strong dollar burden on the US economy. Progress in the labor market and consumer spending are therefore not to be expected. An early warning sign that the recently introduced rate hike cycle could already be stalled. The presidential elections on 8 November 2016 will occupy us after the summer break.
These and other topics will make 2016 a very interesting year for financial markets. One should keep in mind the major advantage of a CFD account – the ability of taking short positions.