The global equity markets have been trading under pressure during the first few trading sessions of 2016, as devaluation concerns over the Chinese Yuan and declining energy prices generate significant headwinds for stocks and currencies. With this in mind, here are 4 key markets to watch in 2016.
- Watch Crude Oil Prices
Crude oil prices are under pressure as global supply continues to overwhelm demand. Demand in the United States the largest global consumer, continues to remain robust, but the warmer than expected weather on the East Coast has driven heating oil prices down and allowed stock piles of crude oil to climb to 80-year highs. Until inventories are run off, prices are likely to remain under pressure. On a weekly basis the U.S. Department of Energy releases its inventory report which can be a helpful guide toward determining future price action for crude oil. When inventories start declining at a faster rate than expected, look for crude to reverse course.
- Keep an on Eye on the Yuan
The Chinese currency has been slowly devaluing over the past 2-months. The issue for the People Bank of China is at the economy changes from export to consumption based, officials need to reduce the value of the currency. This devaluation eventually needs to be a decline of 15% which can be accomplished by a one off scenario, or a slow rip of the band aid. The latter has been the choice, since the central bank is not willing to see if a one off will destabilize the markets. Unfortunately, this slow bleed has corresponded with declining equity values and the movement of money out of China and into the U.S. dollar. Watch for further movements from the PBOC, and how the markets react to their actions.
- The Fed
The Federal Reserve tightened monetary policy in December and is scheduled to meet on January 26/27. Market participants believe there will be no change of policy until March despite the stronger than expected payrolls report which showed an increase of 292K jobs in December following upwardly revised reports for November and October to the tune of 50K jobs. The markets continue to experience volatility and the Fed is likely to take this into account when it meets in January. Keep an eye on Fed speak as the central bank has clearly outlined its policy and should continue to voice its planned actions.
- The ECB
The ECB has seen the fruits of its labor drive manufacturing PMI’s back above the 50 mark, which was better than expected in December. The question is whether the central bank will be willing to add more QE in the face of Fed tightening. The ECB has a communication miscue at its last meeting and investors can be sure they will do everything to make sure this will not happen again.
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