However, it was the first negative year since 2011 with the ASX losing 2.14% in the calendar year of 2015. The S&P snapped a six consecutive year (it was ‘unchanged’ in 2011) and had its worst year since 2008 when it lost 38%. 2015 saw trading conditions shift and the bull run that started in 2008 start to crack.
So, where to for 2016?
The central conundrum
The fundamental question that has been rolling around over the New Year break: With central banks hyper inflating asset prices over the past six to seven years, has the compressed risk this has induced hit levels that could cause it to snap?
It’s a valid question with the change intact from the Fed and the fact that several other central banks has signalled they too are ‘done’ with adding to monetary accommodation.
The market is fully aware of the issue. The concept has been debated since central bank influences were enacted in response to the GFC. The issue is that market participants can’t fight central bank input as the tide of central bank capital flooding through markets has washed away anyone going against it. This has led to crowding into the central bank trade.
From another point of view, central banks over the past seven years have rendered underlying fundamentals irrelevant. The yield trade, long USD or long European equities all clearly show that fundamentals have been routinely ignored due to central banks.
2016 is facing its first major macro change since the GFC – will this mean the market can price assets on actual underlying fundamentals and natural risk profiles? Or will central banks come running back to quash any form of risk if this flares up?
The Middle (energy) East complex
There are even more questions to start 2016, which is interesting considering the oil complex already had more questions than answers at the end of 2015.
What is currently transpiring in the Middle East will be one the talking points of the year. The region hasn’t been this unsettled since the second Gulf War. The difference now, however, is that the tensions are between each other.
The Saudi-Iran tensions adds a layer of complexity that will make the first quarter even more volatile as the West now has a huge dilemma in choosing a side to ‘support’. This is a political conundrum of epic proportions and one that will push governments ethically and economically.
This level of tension in the Middle East hasn’t been seen since the Iraq-Iran conflict in the 80’s. How will the Saudis react? I see them upping production. And the rest of OPEC? More internal fighting, loss of cartel status and the status quo of upping production is likely to continue.
Where does that put the oil price? The end of 2015 saw very light volumes. Volatility was well up on the back of the trading conditions and saw the price shifting fast. However, as more and more traders return, the Middle East tension will dominate trading conditions – $20 a barrel is a real possibility.
Coupled with the fact that non-OPEC, non-US producing nations are showing a high level of resilience to the slowing demand and are powering ahead with production just adds to the theme that oil is going to have a tough year.
These two thematics are going to shape the first quarter of 2016. However, we are entering the first confession season of the financial year – earnings growth is going to be the other question of 2016. Will central bank risk compression, and the fallout from the energy and metals complex be laid bare to the market over the coming month? It clearly will be, and therefore will this be the final reason to see risk breaking free of its post-GFC compression?
It has that feeling – 2016 will be a tricky trading year.
Ahead of the Australian Open
Ahead of the first day’s trade of 2016, we are calling the ASX down 0.43% to 5272.