Financial and Investment Markets Rubik in 2016

News ID: 66008

Date: 17 July 2016 - 09:50

The year 2015 ended with the majority of the markets undergoing downward trend under various factors. The oversupplying conditions in goods markets, specifically petroleum, led to a 30-percent fall in oil price and caused oil market to go through one of its longest slumps. Given the Federal Reserve’s rise in interest rates for the first time in the past decade, an increase in the US dollar value intensified the increase in goods prices. Therefore, in a rare record, gold ounce experienced a 10.3-percent drop, and underwent a downfall in its price for the third consecutive year. Due to the large shares of goods-dependent corporations, international stock markets experienced a downfall trend, and the stronger dependence of newly-emerging economies to these markets caused them to experience sharper falls.

The markets in 2015 were closed while diminishing trends ruled over the majority of the world stock markets. It was a year full of ambiguities and crucial events and it witnessed the breaking of many records. Bloomberg Consumer Goods indices(BMCONSG) falling to their lowest since 1999, an increase in U.S. federal interest rates after a decade, China’s economic growth reaching its lowest in the past 24 years, and Iran’s nuclear case being finalized after 12 years of negotiations were among the most paramount and influential events on the records of stock markets. Besides, Geopolitical unrests which followed ISIS’ terrorist attacks, immigrants’ crisis in Europe and Greece’s debts were among the other factors that created unpredictable situations in many international markets. Now in 2016, many ambiguities are still in place. Concerns about China’s future economy and newly-emerged markets, the rising trend of U.S. federal interest rate, and the U.S. 2016 presidential elections are among the most significant issues which, according to experts and authorities, will hammer out a hard year for world economy and markets.

Perhaps, the most important event in 2015 (commencing halfway through 2014 and going on into 2015) that greatly influenced world economy was the increase in the value of U.S. dollar, which occurred simultaneously as Chinese economy slowed down and international goods prices increased. These three events were three angles of a triangle whose impacts and operation were closely tied. It is approximately one decade that goods market has boomed in a super-cycle, since Chinese economy was considered the dragon of goods consumers with its approach to develop infrastructures. Thus, except for a short period of fall in international process in 2008-2009 recession, the price of basic commodities soared in a rapid pace. Expert proposed that the main drive for this increase in goods prices was the increasingly demand of China. However, since the second half of 2014, Chinese economy began to stage some weaknesses in its growth, and concerns about the undeniable problems in economic growth of this country (as an economic model based on developing infrastructures) shadowed their influence on world markets. Simultaneous with the signs of decreasing in demands, the supply sector began to accelerate and get stronger. The clash of these two parties resulted in oversupply and a downward trend for commodities markets.

Other than these fundamental affairs, another factor that accelerated the fall in good prices was the growth of U.S. dollar value in comparison with other currencies. Since the majority of commodities are valued based on U.S. dollars, the growth in U.S. dollar value reduced the prices of commodities. That is to say, if we intend to receive dollars in exchange for a certain amount of goods that we have, the higher dollar value gets, the less dollars we earn for that certain amount of goods. Hence, it is no surprise that the increase in U.S. dollar value results in a fall in the international prices of goods. Looking into the reasons of dollar value’s rising, we must seek the answer in world crisis years; by this, I mean the time when the U.S. Central Bank pioneered quantitative easing policies and injected money supplies to its economy. Following the U.S., many economies opted for this approach; nonetheless, it was partially altered since signs of economic revival were observed in U.S. economy. Hence, while other world master economies (e.g. Europe, China and Japan) had adopted quantitative easing policies, Federal Reserve did not see any point in continuing these policies seeing that U.S. economy had already revived. As the world largest economy began to take steps into austerity policies, dollar value began to rise: a factor that not only led to a decrease in goods prices, but also fortified pressure on all the economies that depend on exporting raw material.

Alongside the mentioned factors, three issues that caused uncertainty in the 2015 markets resulted in fluctuations in financial markets. First, it was the crisis of Greece’s debts, which had caused grave concerns about the future of European Union. With the leftists taking power in Greece and their mottos as to not accepting austerity reforms, the possibility of this country’s exit from the EU increased noticeably. Given the poor economic situations in some Euro-Zone countries such as Spain and Italy, the exit of Greece might have resulted in other country’s domino-style exit from the EU. Therefore, a dramatic fall in Euro’s value (i.e., the rise of dollar’s value in some way) and as well a dramatic fall in the region’s stock markets ensued. Even though the disputes between the Greeks and the loan givers were settled up to a large extent, the provisional impact of this matter and the unreliability that it created in the Euro-Zone, influenced many markets.

The second issue was the unrests that ISIS created in various parts of the world and impacted the markets as a geopolitical factor. When the terrorist acts engagements heated up, like the time when Paris massacre occurred, commodities prices increased while stock markets hit the slump. It seemed that the markets were vaccinated against ISIS, which had heavily influenced them since early 2014. However, unless these unrest are settled seriously, markets will be intensely influenced and harmed by the terrorist acts of this group.

One other significant issue in world markets was the historical agreement between Iran and 5+1 over nuclear issues. This agreement had two different impacts on financial markets. First, the larger possibility for Iranian oil to flow into world markets caused a remarkable decrease in oil prices. Second, reducing concerns over the geopolitical issues in the Middle East that through Iran’s gaining power . The second impact was less bold, though. Nonetheless, Iran and 5+1 agreement managed to lead stock markets toward thriving for a period of time. Ambiguities about the pace of Iran’s oil production and its manner of interactions with other countries are potential to have more impacts on the market in the longer run.

In a nutshell, an integration of the aforementioned factor shadowed all markets. The majority of the currencies and basic commodities underwent a downfall, and in the light of the more colorful role of commodities corporations, stock markets received losses. In the currencies markets, downfalls up to 50 % were witnessed, whereas the currencies which grew experienced percentages of less than 20. This way, Somali shilling, Seychelles Rupees and Gambian Dalasi grew 17 %, 10 % and 8 %, respectively and recorded the largest growth in national currency value. On the contrary, Azerbaijani Manat, Kazakh Tenge, Zambia kwacha, Belarusian ruble and Argentine Peso experienced falls of 50 %, 46 %, 42 %, 41 % and 35 %, respectively and had the weakest currency market performance.

In the area of commodities, the largest falls were observed in the field of energy. Fuel oil, Brent Crude oil, and West Texas Intermediate (WTI) crude oil experienced the largest falls with price reduction of 40 %, 35 %, and 30 %, respectively. Growth in dollar index, a drop in China’s demand, Oil shale producers’ not reducing their production, larger production of OPEC members, competition for larger market share and expectations for more Iranian oil in the world market could be counted as the most significant reasons for a reduction in oil prices. In the metal market, Palladium and Platinum staged poor performance by downfalls of 31 % and 28 %, respectively. The scandal of Volkswagen Corporation should be partly blamed for this downfall since this company is one of the world’s largest customers of Palladium and Platinum for its diesel engine’s catalysts. Cupper, with 25 % of fall, was ranked third in the list of metals with poor economy. For three consecutive years, gold ounce witnessed a downward trend price-wise, falling 10 % in 2015. In the agriculture sector, however, cotton was one of the few goods to see growth, with 6 % of rise. Meanwhile, coffee underwent a downfall of 26 % and had the poorest economic performance among agricultural product

As the largest stock market in the world, U.S. market experienced a downfall of 0.8 % after three years growing at two-digit percentages. This is considered the poorest performance of this country since 2008. While S&P and Dow Jones indices were falling, Nazdak index grew 5.5 % thanks to the support of prominent IT businesses (except Apple) and biotechnology companies. In 2015, U.S. experienced the smallest rate of first releases since 2009. Besides, junk bond witnessed a falling trend for the first time since 2008: an issue which intensifies the concerns of future risky investments (e.g. investment in petroleum market).

European stock markets did not stage monotonous trends: some had partially acceptable growth and some had huge losses. With a growth rate of 28 %, Ireland staged the greatest performance among European markets whereas the worst performance belonged to Greece with 58 % of decrease. This massive drop, though, stemmed from its debts crisis. Overall, European stock markets achieved an overall growth of 2 % and Euro Zone recorded a total growth of 8 %. The aforementioned nominal growth occurred due to the downfall of Euro value versus dollar value, in a way that European market experienced an overall loss of 5 % compared to the American market. To prevent the downfall in economic growth and deflation, EU central bank started quantitative easing from early 2015. Based on the plan of EU central bank, a monthly sum of 60 billion Euros (total of 1100 billion Euros) will be injected to the EU in the spirit of quantitative easing. This policy came in contrast to U.S. austerity policies and resulted in a drop in Euro value. Moreover, a brisk look into active stocks in European economy depicts that commodity-dependent companies had a key role in the reduction of stock indices. As a case in point, there was a 75 %, 70 %, and 65 % fall in the stocks of Anglo American, Glencore and Sea Drill mineral companies, respectively.

A comparison of performance in European stock markets demonstrates the downfall of Euro value in comparison with dollar value, and as a result, there was a huge difference between the variations of stock market indices based on local currencies and U.S. dollars. However, countries whose currencies had little downfall versus U.S. dollar (e.g. Switzerland) did not experience much change in their stocks index.

On the other side of the story lied the newly-emerging economies that had a terrible year of losses and downfalls. Not only did the national currencies of these countries drop significantly, but their stock markets also witnessed sever downfalls. None of the indices newly-emerging markets could achieve growth based on U.S. dollar. Brazil had a downfall of 33 % (based on its market value in U.S. dollar) and hence recorded the worst performance among newly-emerging markets. Russia, on the other hand, had the best performance. The large dependence of newly-emerging economies on raw material exports and their high dollar debts were the most crucial reasons for the clash of their stocks. That is to say, the fall in the international commodities price and the rise in the value of dollars have raised concerns as to the future profitability of these economies’ enterprises.

For the second consecutive years, Tehran stock exchange kept its falling trend, which was a rare phenomenon. Studies highlight that the difference between Rial-based and Dollar-based Index downfall in Tehran exchange is minor, and this demonstrates that exchange rate in Iranian free market was not fully adjusted while international prices were sharply falling. Hence, not even proper nominal profit was raised for Tehran market stock owners. Of course, the conditions changed after the historical agreement of Iran and 5+1. The execution of Joint Comprehensive Plan of Action (JCPOA) promoted the efficiency of Iranian market to be the top market in the world in the first three months of 2016 with the profit of over 26 %. Thus, this signals a booming year for Tehran market.

Overall, based on the reports released by World Federation of Exchanges (WFE), the volume of exchanges in international markets in 2015 staged a 55 % growth compared to 2014. The values of these exchanges, as well, grew 40 % in 2015 compared to the previous year, owing mainly to the growth of activities in Asia-Oceania exchanges – namely that of China. The total value of exchanges in international markets in 2015 reached 114 trillion dollars, while it was only 81 trillion dollars in 2014. The shares of Asia-Oceania exchanges in 2015 reached 54 trillion dollars that demonstrates a 127 % rise compared to the same figure in 2014. The total value of bonds and securities did not depict a major change in 2015, and reached 67 trillion dollars with a downfall of approximately 1 %. U.S. markets had the largest share in this downfall. Moreover, the total amount of new releases in 2015 ascended 10 % compared to 2014, but the flow of fund from them decreased 17 %, reaching 202 billion dollars. The fund resources from these releases grew 41 % and reached 914 billion dollars. Finally, the share of exchange derivatives grew 11 % in 2015, which was mainly caused by commodities and currency derivatives.

Vague Future of Stocks in 2016

Survey on the stock exchange markets in 2016 from 250 analysts highlights that only half of the 20 grand indices worldwide have the power to grow.

This survey, which was conducted on 250 analysts of stock market and executives worldwide in the first quarter of 2016 depicts that the majority do not picture a positive horizon for the future of stock markets in this year, seeing that they believe U.S. central bank’s decision on interest rates is a huge risk.

Based on this report, while many analyses and predictions had already pictured growth opportunity for all 20 important indices worldwide earlier, the most recent survey highlighted that only 10 indices have the capability of growth this year. The main reason of this negative prediction is the big shock from the fall in Chinese Yuan’s value and the concerns about a slow-down in the growth of world economy.

Falling Commodity Prices and continuity of concerns about weak consuming inflation rates even after extensive financial policies have caused many investors to take defensive position; hence January and February 2016 passed on with full fear in the markets. Yet, March turned into a positive spot for exchange markets and thanks to the optimization in oil prices and the new financial policies of EU central bank, big indices started to grow. Despite all these, the output of government bonds in the first quarter of 2016 decreased.

The fact that only few analysts speculate the output of bonds will increase depicts that investors are yet to be convinced that world economy will be growing any time soon. Hence, the future prospect of exchange markets is blanketed by a haze of ambiguity. Meanwhile, the executives of large investment funds have recommended their customers to reduce their investments in stocks to the smallest they have had in the past 5 years.

The massive sales in S&P 500 index has ended; however Reuters’ survey on the situation of big stock markets highlights concerns over poor incomes and the stability of dollar’s high value do not picture a desirable year for markets in 2016. But, up to the end of 2016, it is predicted that European stock markets grow 8 %. In addition, despite massive exit of funds, the prospects of newly-emerging markets have slightly improved. For the big indices of Latin America and Asian market, as well, a 6 % growth up to the end of the year is predicted. Indices of the developed markets are predicted to grow only 5 %, though.

Overall, 2016 is a difficult year for the world economy. Although some experts believe the performance of the stock markets in the previous year would pave the way for the growth of stock price in 2016, too many ambiguities threated this view. Of these ambiguities, concerns over the future of Chinese economy and dollar-based debts of newly-emerging markets seem to be the most significant ones. If China fails to improve its economic growth and the low price of raw material imposes more pressure on newly-emerging markets, a new shock in world economy would not be surprising.

On the other hand, U.S. Federal Reserve’s increasing of the interest rates has raised a lot of concerns. If U.S. central bank raises the interest rates with a high acceleration, world demand or in other words, world liquidity will decrease; and given the current weakness of the world economy, this matter is prone to create a crisis. The next U.S. presidential election is also another political risk factor ahead of stock markets. The commander in chief of the world’s largest economy does definitely have an impact on world’s exchange markets.