Market Views For 2016 - page 3
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Here Is Why We Forecast US Treasury Yields To Rise In 2016 - Goldman Sachs Looking ahead, we forecast 10-yr benchmark Treasury yields to rise to 3% by end 2016 - or 50bp above the forwards. This expectation is built on the following set of assumptions.
1-An ongoing above-trend economic expansion: US 10-year Treasury yields currently compare with a 'fair value' estimate of 2.7% (i.e., are around 1 standard deviation too low) based on our Bond Sudoku model. Factoring in our economists' macro forecasts for above-trend GDP growth, an acceleration of inflation and higher policy rates in the US alongside macro developments abroad, our model 'fair value' estimate increases to 3.4% by end-2016. In forecasting a 3% yield by next December, we presently assume the 'valuation gap' to remain the same as today's, to reflect the ongoing QE in the Euro area and Japan.
2- Fed hiking more than priced into the forwards: An important ingredient in our estimates is our US Economics team forecast of the Fed hiking four times this year, or by a cumulative 100bp to 1.30%. The market instead sees rates at 90bp after the 14 Dec 2016 FOMC meeting, with two-thirds of the probability mass in a 60-110bp range. Using the market pricing for the effective Fed Funds rate, our measure of 'fair value' for Treasuries would be around 10-15bp lower (or 3.25%), all else equal.
3- An upward shift in medium-term inflation expectations: We see CPI inflation picking up during 2016, led by the services categories. Although this is already reflected in the fair value estimates discussed above, an increase in service inflation (ex-energy) from the trailing 2.9% towards 3.5% (levels last seen in 2007-08) may well act to lift medium term inflation expectations, and thus the term premium. Such an outcome underpins our view on that the 2-10-year nominal term structure will steepen over the next couple of quarters. To be sure, the high volatility and downward pressures in crude oil prices continues to keep the term premium depressed. But we expect these effects to wane and reverse during the course of 2016, as crude oil prices increase towards our 12-month forecast of US$ 50 per barrel on WTI, from US$ 37 per barrel at the time of writing.
4- A higher expected terminal rate and an increase in term premium: An historical analysis of the behaviour of the US yield curve during previous four Fed tightening cycles reveals that the market has always progressively revised upwards its view on the 'neutral' level of rates as the Fed pushed policy rates upwards (see 'How Will Bond Yields Move in the 100 Days After the First Hike ', 11 Sep 2015). In other words, expectations on the degree of monetary tightening the economy could withstand have in the past tended to be adaptive. We judge the current market-implied level of neutral rates (around 50bp in real terms) as too low. By contrast, as the hiking cycle extends, the norm is for the 'term premium' to decline from relatively high levels in proportion to terminal rate expectations (on the average of the past 4 cycles, around 75%), a phenomenon particularly evident in the 2004 cycle (here we use the NY Fed's ACM estimate of the term premium). Presently, the term premium is zero. Although there have been periods, like in the 1960s, when the term premium was very low, it has not been negative outside short periods of time."
Francesco Garzarelli - Goldman Sachs
JPY And CHF: What To Expect Next Year JPY Faces Risk Of More QE In 2016
In 2015, the Japanese yen was one of the best-performing G10 currencies. It held steady versus the U.S. dollar and strengthened sharply against the euro, British pound and commodity currencies, rivaling the greenback in gains versus the CAD, NZD and AUD. While U.S. stocks climbed to fresh record highs in 2015, the outperformance of the Yen and the U.S. dollar, two of the market’s favorite safe-haven currencies, tells us that 2015 was a year of uncertainty and anxiety. From the Greek crisis to the Paris attacks, there were no shortages of issues for investors to worry about though geopolitical risks were not the only reasons why investors bought the yen.
Like the U.S., in 2015 the Japanese economy was on the road to recovery. While there were periods when growth appeared to be lacking – the economy contracted 0.1% in the second quarter, a weak currency and falling energy prices helped the country recovery quickly. With the U.S. dollar expected to strengthen further and oil prices expected to remain weak, the Bank of Japan felt little pressure to increase stimulus. By the end of the year, BoJ made only a technical tweak to its QE program. While it represented a small dose of easing, policymakers were quick to downplay the move causing some analysts to believe that the adjustment diminished the need for another round of QE in 2016.
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Preparing for 2016 As we move closer to end of 2015 trading has been relatively light as most traders have opted to take an extended holiday. Oil prices continue to be the main drama setter, with prices for both WTI and Brent indexes under renewed pressure after the pre-Christmas surge. This has seen the share prices and currencies of energy producers take a knock while the loonie has managed to stay above the fray, holding onto its gains from earlier in the week. Looking outside of its positioning against the loonie, the greenback is broadly higher as both the euro and pound lose ground to their American counterpart while across the pacific the Yen is trading flat against the dollar.
With an eye towards Asian equities, it’s clear to see that the combined effects of the great commodity crash of 2015 along with the seasonal period of low volatility have conspired to put traders in a fragile mood as equity indices in Japan and China couldn’t hold onto much of their gains for the day and closed out trading only slightly higher. As trading moves to European markets the pressure on risk assets continues unabated, with indices covering the broader EU as well as the UK, France and Germany all taking a bath in lockstep with the 2% loss seen in Brent Crude.
As the penultimate day of trading in 2015 is set to open in North America this morning we move closer to capping off a year that has been unprecedented for the currencies and the broader capital markets. 2015 has seen corporate organisations in Canada and internationally contending with the impacts of relatively extreme fluctuations in the values of the currencies in which they transact as broader developments within the global macroeconomic landscape impact their businesses in ways previously hard to imagine. Within this context, an ever increasing amount of fickle capital flowing through capital markets, diverging monetary policy in North America, Europe and Asia, as well as a rapidly slowing Chinese economy and overall slower economic growth globally, the stage is set for a 2016 that will be as volatile if not more so than the year now closing. With that said now more than ever it makes sense for managers to determine the implications of FX volatility on their business and work with their trading teams to outline a strategy that will allow them to secure their business and enhance their competitive position as we move into the New Year.
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The Year That Was - Eurozone - Struggling Along If 2014 was chaotic for Eurozone, 2015 was worse when the threat of the collapse of the single-currency union turned real, prompting leaders to deal with it head on. The year also saw the bloc as well as the rest of Europe reeling under the pressure of the huge influx of migrants from the crisis-torn countries in the Middle East and North Africa. The 19-nation economy trudged through the gloom with modest expansion rates, while the central bank was all action as its inflation targets proved ever more elusive.
Surviving Greece
"Make men work together show them that beyond their differences and geographical boundaries there lies a common interest." - Jean Monnet
Vindicating the words of Jean Monnet, the French diplomat who was the prominent champion of European integration, the theme of "common interest" was the force that brought together Eurozone leaders and policymakers for long huddles several times this year to figure out ways to avoid one of their most feared threat - the exit of Greece from the currency union, dubbed the "Grexit" and the subsequent collapse of the euro area.
The Greek drama played out over the first half of the year and tested the will of the Eurozone leaders and policymakers to the hilt. Greece and its creditors - the International Monetary Fund, the European Commission and the European Central Bank - were engaged in talks to release the remaining funds from a second bailout for the country, after the leftist Syriza party, led by Alexis Tsipras, came to power following a snap election in late January.
Despite marathon meetings and a bevy of proposals, both sides failed to reach an agreement with creditors rejecting Greece's request for debt relief among others and Greece resisting creditors' austerity demands mainly on pensions, taxes and public spending. In late June, both sides were torn apart further and talks were stalled after Tsipras surprisingly called for a public referendum on whether to accept or reject creditors' austerity demands.
Greeks rejected harsh austerity measures demanded by the creditors in the July 5 referendum with a massive margin of over 61 percent.
Without external aid, cash-strapped Greece defaulted on a payment to the IMF that was due at the end of June. It was the first time the country failed to honor a payment to the lender during the five-year long economic crisis.
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It's not even 2016 yet, and Wall Street is already revising its 2016 target for stocks A little over a month after setting a 2016 year-end price target on the S&P 500, RBC's Jonathan Golub is already scaling back his call.
Because, when the the facts change, one changes one's mind.
"On November 20, we published our 2016 outlook with an S&P 500 price target of 2,300," said Golub, RBC's chief equity strategist. "Since that time, WTI has fallen by nearly 10% and bottom-up analyst estimates for 2016 have fallen by 1%. Further, economic trends have softened, with the November ISM at 48.6, well below the 53.7 average of the past 3 years."
Golub now sees the S&P ending the year at 2,225.
It's pretty unusual to see a revision so soon, partly because it's understood that things like commodity prices and economic data can be noisy and volatile in the short-term.
But the myriad of negative headlines and magnitude of the moves seem to be significant enough that at least one Wall Street pro is willing to make a tweak.
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2016 Forex Market Outlook Top Forex Themes For 2016
Since the next two weeks are generally the quietest periods in the financial markets, we want to take this opportunity to think longer term and share with you our currency forecasts for 2016. We’ll start with an initial review of the top themes and explore them in further detail as the week progresses in our outlook for each of the major currencies.
But first -- 2015 has been a big year for the foreign-exchange market. Divergences in monetary policies led to strong moves in currencies with the U.S. dollar as the best performer. The U.S. saw its first rate hike in nearly a decade while other major central banks in the Eurozone, China, Canada, Australia, New Zealand and Japan eased. In response, the greenback climbed to multiyear highs and this strength translated into significant weakness for many major currencies -- along with a collapse in commodities.
That said, here are some of the FX milestones reached in 2015:
FX Milestones In 2015FX Milestones In 2015
The greatest risk for the financial markets and the global economy in the coming year is the feedback loop from the dollar and Fed policy. While the quarter point hike in December represents only a nominal increase in U.S. rates, the Federal Reserve expects to tighten 4 additional times next year, which will have broad ramifications for currencies, equities and commodities. In mid-December, we published a piece outlining the Consequences of a Strong Dollar and a lot of these issues will return to focus in 2016.
The first few months of the year should be good for the dollar as long as Fed officials don’t backtrack on their hawkish views. There will be more hawks voting on the FOMC in 2016 than 2015 so the balance swings in favor of continued tightening. Between the warm El Nino weather and gas prices below $2.00 a gallon in some states, consumer spending should also rise in the first quarter. So while the dollar is rich, the path of least resistance is still higher. However our outlook changes in the second half of 2016 as we believe rate hikes and the strong dollar will force the Fed to slow its tightening, marking a top for the greenback and the bottom for other major currencies
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10 investing mistakes not to make in 2016
1. We have no idea what we’re doing…
Over the last four decades, the 401(k) plan has replaced the pension as the main form of retirement plan. About 31% of workers had so-called defined contribution retirement plans in 2008, up from just 8% in 1980, according to the Social Security Administration. That means many Americans are now managing investments on which their financial well-being depends—and doing it in their spare time.
Unfortunately, many lack the basic financial literacy to be any good at investing. In a 2012 study by the educational foundation of the Financial Industry Regulatory Authority (Finra), the brokerage industry’s self-regulatory body, the average U.S. adult correctly answered only 2.9 out of 5 basic financial questions about topics like risk, inflation, interest rates and mortgages. (Only 14% answered all five questions correctly.)
The average American doesn’t follow market news that closely, either—and when you don’t know what’s going on, it’s harder to make good decisions about your money. In 2013, the S&P 500 index rose 30%. When asked in a Gallup poll a few months later how the market had performed that year, however, only 7% of respondents recalled that it had done that well; 30% thought stock prices had either been flat or gone down .
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January 2016 forex seasonal trade #3: Euro winter blues A look at three of the top forex seasonal patterns for January:
#3: Euro bears get back to work
January is by far the worst month for the euro. Snce its inception the average decline has been 1.27%. Ten of 16 years have been negative including a big decline last year after the ECB eased.
The next ECB decision is Jan 21 but expectations are low. Central bank officials blamed market participants for getting overly enthusiastic about the potential for easing and said they want to wait and see how current programs pan out.
The top event to watch early in the month is the December German CPI report, which is due on Monday, January 4. German jobs data is due a day later.
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2016 FX Outlook: The Year The USD Peaked – Credit Agricole
Here is the view from Credit Agricole:
The tug of war between central bank policy divergence and global currency wars should continue to drive price action in G10 FX markets next year. The relatively strong domestic fundamentals in the US and the UK should allow the Fed, and to a degree the BoE, to tolerate further currency appreciation against low-yielding funding currencies like EUR, CHF and JPY.
With many positives in the price, we expect both USD and GBP to peak next year. In the case of USD NEER the peak should come towards the end of 2016 once the Fed tightening cycle is well underway. GBP should fare less well and we expect renewed weakness in H216 ahead of the EU referendum.
Policy divergence should keep EUR/USD and EUR/GBP under pressure. EUR should remain relatively more resilient against risk-correlated and commodity currencies as well as CHF and JPY. We expect EUR/USD to trade through recent lows in 2016 but parity is not our base case. The cyclical recovery in the Eurozone should accelerate and ultimately limit the scope for aggressive easing by the ECB, paving the way for a EUR rebound in late 2016 and 2017.
2016 Forex Market Outlook Since the next two weeks are generally the quietest periods in the financial markets, we want to take this opportunity to think longer term and share with you our currency forecasts for 2016. We’ll start with an initial review of the top themes and explore them in further detail as the week progresses in our outlook for each of the major currencies.
But first -- 2015 has been a big year for the foreign-exchange market. Divergences in monetary policies led to strong moves in currencies with the U.S. dollar as the best performer. The U.S. saw its first rate hike in nearly a decade while other major central banks in the Eurozone, China, Canada, Australia, New Zealand and Japan eased. In response, the greenback climbed to multiyear highs and this strength translated into significant weakness for many major currencies -- along with a collapse in commodities.
read more