2016 is expected to be an interesting year in the global financial markets. Currency fluctuations, diverging monetary policies and uneven global growth will make for a challenging investing environment. Below are our top trade picks for 2016 in the currency, commodities and stock index markets. As you can tell, next year may present many shorting opportunities.
Forex
EUR/USD
The EUR/USD exchange rate is trading around seven-month lows as of November. The currency pair may decline next year as the US Federal Reserve begins normalizing monetary policy, thereby strengthening the dollar even further. The US dollar index, a weighted average of the greenback against six global peers including the euro, has surged more than 24% since July 2014. Higher US interest rates may strengthen the dollar and as a result, Goldman Sachs recently tipped the US dollar as its top trade for 2016.[1]
Meanwhile, the European Central Bank (ECB) is widely expected to expand its monetary policy program in the coming year to stimulate economic growth and reflate the Eurozone. The combination of a stronger US dollar and accommodative ECB policies could push the EUR/USD to parity in 2016.
Precious Metals
Gold
Gold is expected to start 2016 under pressure[2] before recovering modestly later in the year. While this might provide a good long opportunity, the outlook on the yellow metal is overwhelmingly bearish. The prospect of higher US interest rates and uneven investor demand may keep precious metals under pressure for the foreseeable future. After all, higher interest rates translate into a stronger US dollar, which raises the opportunity cost of holding non-yielding assets, chief among them being gold.
Energy
West Texas Intermediate (WTI)
As global supply continues to outpace demand, oil prices may be in for a long-term slump. The combination of peak OPEC production, a US shale boom and declining demand from China may keep oil prices capped below $50 a barrel next year.[3]
The West Texas Intermediate (WTI) benchmark for US crude has plunged 60% since July 2014 and might average around $45 a barrel next year, according to Goldman Sachs. In fact, the US investment bank said the WTI contract could fall to $20 a barrel in a doomsday scenario.[4] Much like gold, WTI may provide short-term buy opportunities, but the underlying market fundamentals are overwhelmingly bearish.
Agriculture
Sugar
The lone positive signal on our current list goes to sugar, an agricultural commodity with “the most bullish fundamentals of all agri-commodities through 2016,” according to Dutch bank Rabobank. Sugar prices are forecast to rise steadily through 2016, although the overall market will be pressured by currency fluctuations. For countries such as Brazil – a major sugar exporter – a weaker local currency will provide incentive for increasing production. However, investors should be closely monitoring trends in China, where sugar consumption is expected to fall 3% year-on-year in favour of cheaper alternatives such as high-fructose corn syrup.[5]
Stock Indices
Nasdaq
Investors may see another lackluster year for US stocks characterized by low returns, weak corporate earnings and growing perceptions of an overvalued equities market. According to analysts at Goldman Sachs, including dividends, the total returns on stocks in 2016 will be 3%.[6]
The Nasdaq index might face more volatility due to its heavy composition of technology and biotechnology firms. Biotech stocks could be the first to fall if the overall market weakens. Not only are biotech stocks more expensive and highly speculative, they might get caught up in Washington’s political crosshairs.[7] 2016 is an election year, and the Democrats have made it a point to go after pharmaceutical companies for skyrocketing drug prices. As the narrative plays out, biotech companies, and by extension the Nasdaq, may be in for a tough year.
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[1] Marc Jones and Jamie McGeever (November 19, 2015). “Rising U.S. dollar tops Goldman Sachs’ 201 trade tips.” The Globe and Mail.
[2] Kitco (November 24, 2015). “TD Securities: Gold May Start 2016 Under Pressure, Then Recover.”
[3] Ben Sharples and Grant Smith (September 11, 2015). “How Low Can Oil Go? Goldman Says $20 a Barrel Is a Possibility.”
[4] Ben Sharples, Grant Smith (September 11, 2015). “How Low Can Oil Go? Goldman Says $20 a Barrel Is a Possibility.”
[5] Emiko Terazono (November 27, 2015). “Currency moves to have big impact on agri-commodities in 2016.” Financial Times.
[6] Akin Oyedele (November 24, 2015). “Goldman: Stocks will go nowhere in 2016.” Business Insider.
[7] Bankrate.com. Best and worst investment ideas for 2016.
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