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The New Year:
January proved unforgiving to investors, as global equity value lost more than $4tn within the first ten trading days of the year. Most came as a result from negative sentiment circling China’s economic slowdown and depreciated currency. Additionally, bond markets took a hit as central banks took upon selling reserves in attempt to maintain their currency’s strength. As a result, investors pulled capital from these currency denominated bonds in search of higher yields elsewhere.
The Brexit vote proved a great shock to financial markets, given the greatly anticipated investor sentiment of a ‘stay’ vote. In light of the ‘leave’ vote, the UK was expected to experience a weaker currency along with a depressed value on their sovereign bond yields.
Plaguing Italy’s banks from as early as July were Italy’s constitutional referendum coupled with the stockpile of bad loans. Italy voted ‘No’ to reforms which resulted in the resignation of their Prime Minister Matteo Renzi, leaving with bank shares still heavily depressed.
The shock of Donald Trump’s victory was shock lived for markets, as investors quickly embraced a republican led Congress being a driving force for enforcing corporate tax cuts, fiscal stimulus and easing off regulations for businesses. Shortly after, ‘Trumpflation’ took hold of investor sentiment, whereby fiscal policies would accelerate the economy and stimulate inflation.
Global equity prices experiencing a rebound, many expected a similar turn of events to unfold for oil production during the late November OPEC meeting in Vienna. An agreement between non-OPEC members to cut production levels in December helped foster an increase in oil prices. Production cuts were motivated by the economic strain inflicted by lower oil prices on the economies of producers.
With share prices on the decline during the first four months of the year, many doubted the Central Bank’s ability to move the economy out of its deflationary clasp. However, nine months into the year commodity prices rebounded, and coupled with the various promises from Donald Trump to cut tax rates and boost government spending when he enters office, markets reacted positively to the much anticipated reflationary catalyst.
Federal Reserve (US):
Rising inflationary sentiment taking hold, investors began anticipating a subsequent rise in the economy’s benchmark interest rate to help offset the prospects of rising consumer prices and accelerated investment activities.
The rally in commodity prices gave stability to the energy sector, with Brent crude, a common international benchmark, soaring by 90% from its February lows.
Euro banking stocks welcomed a much need rally after the a crimpling sequence of events that took place during the first half of the year, where a negative outlook from the UK’s Brexit vote, negative interest rates, multiple legal penalties and fears over the Italian banking sector depressed share prices.
The aftermath of the EU referendum vote left cruel consequences for the sterling. Despite resilient economic forecasts that portrayed a robust economy, sterling plummeted 16% in 2016.
President elect Donald Trump’s anti-trade rhetoric weighed massively on the peso’s value, and subsequently depressed the economic outlook for the world’s second most traded emerging market currency.
Active fund managers took a beating in 2016 as a flood of investors transferred out their assets into passive index tracking funds. Capital in the passive fund industry rose above the $5tn, a first on record. In contrast, actively managed funds saw an outflow of roughly $350bn, with assets in the industry wavering around $10tn.