During the past 2015, global instability has strengthened. We’ve all heard about wild terrorist attacks, multiplied by wars, raw economics collapses. The countries that were regarded to be prosperous showed their unattractive sides. What were the last 12 months about? What is 2016 preparing for us?
Curiously enough, on the first site nothing particularly outstanding happened here. In spite of FRS threats to tighten rates (and that finally happened on the level that didn’t influence anything mostly), other countries market rates remained more or less consistent. In the US, monetary tightening lead to a slight rates increase, but did not reach their peaks as of 2013 to 2014. The Treasuries yield didn’t rise more than 2.5% while at the beginning of 2014 it was at 3% level.
Exactly the same is true for other government bonds. The interest rate for the UK, other European countries (in Euro zone) and Japan did not change compared to 2014, despite the currency emission fact by the Central Banks of the latter two. A noticeable reduction of interest rates happened in China, however, due to Central Bank quantitative easing and developing deflation. The Russian 10 year bonds interest rates also dropped from 14% to 10% in 2015, but as the oil prices go down, the rates grow.
Just the opposite happened on the markets where negative processes took on in the past year. Brazil is standing out here with growing political crisis – President is on the verge of impeachment, mass corruption scandal, etc. – and hardest ever economic crisis. The percents went up to the level of 2008 and that’s not the end. Of course, other countries had their portion of “fun” as well, like South Africa where Ministers of Finance were changed twice in one week. The rates reached the peaks of 2008 and threaten to establish new highs.
Low-rated borrowers corporate bonds fill another segment of the monetary market that is going to suffer a lot. These assets were the first ones to benefit of the soft monetary policies of world Central Banks (including the US). The reliable assets yield was almost zero and investors were looking for some greater than zero profit. Thus, they were more willing to buy securities of dubious quality. Oil prices huge decline caused great problems for small slate miners at the end of 2014. In 2015, the problems intensified and spread across to all the junk sector so that the rates reached the peaks of 2009. Hence, the series of bankruptcies. And the process is only at its start as large funds, experiencing their portion of losses due to investments into junk bonds, cut them off even damaging themselves but avoiding total collapse in the near future.
Market prospects in 2016 depend on many factors. Avoiding speaking about Third World War and other threats of this kind, it’s clear that FRS monetary regulation will become the main influencer. The plans are not yet obvious, but the recent Fed forecasts include four rate increases in 2016. At the same time, we can remember that the previous plan was to have 5 to 6 rate tightening and the market behaves as if those four were also far from possible. Poor macroeconomics led traders to prepare for two interest increases – once half a year. The market obviously reflects the situation. If it becomes better, the yield will get higher producing similar dynamics in other regions. If it becomes worse, the interest will be dropped. The trick is that there are no visible prospects of anything better than stagnation.
US dollar continued growing at the beginning of 2015 – but the process lasted only until the end of the first quarter. Then the dollar (and other major currencies) entered the float phase leaving with even hands as a result. During the year, the yen and the Swiss franc almost did not change; the pound fell slightly, while the euro fell remarkably. At the same time, that happened at the start of 2015 and by the end of the year there was no dynamics visible. It may seem that the US dollar course correction will continue – but then it is probable to resume the upward trend which may last up until 2017 or longer.
Commodity currencies (Australian, Canadian, New Zealand dollar, etc.) had a much worse experience. They have significantly fell down compared to their US peer. Emerging markets currencies looked even gloomier: Brazilian real necked down in half, Argentina’s new government had to devalue the peso consistently, etc. Yuan was caught by the same lot, though to a less extent, of course. The Chinese Central Bank had spent hundreds of billions of dollars of reserves to stabilize the exchange rate of its currency – but did not really succeed. However, that was enough to escape the horrors of other emerging economies. Nevertheless, the yuan course being now the worst for nearly 5 years (in fact, it’s the first drop since the first half of the 1990s) does not prevent the local authorities from their “internationalization” policy. Yuan has already been included into the IMF currency package, the currency trading session in China has expanded, and the market has become more flexible, etc.
As expected, the leading stock exchanges swiftly took a lead from the autumn 2014 drop and streamed up. Unexpectedly then they came to a deadlock which lasted till August. Just as suddenly then they collapsed by 10-20% in just 3 weeks. But that was it, and the key indices began to grow slowly. All the signs of a bubble remain from the previous year and have even deepened – as in the second half of the year corporate profits (along with sales for sure) went down, but the capitalization did not change. Thus world stock exchanges didn’t lose anything. Most of the USA (NASDAQ), Germany and Japan rose. Great Britain dropped a bit along with emerging market countries and commodity economies indices. S&P-500 fell 0.7% a year though showed growth two hours before the New Year.
The stock market behavior in 2016 is hard to predict. Basically, most of it depends on the Fed behavior – if its tightening will go expectedly dull or stop at all, nothing will prevent stock growth and delay the drop. On the contrary, hastened interest rates raise can indeed collapse the market just in several months. In this case, it is a key factor for exchanges not only in the US – the global financial system is now firmly depending on the policy of the US Central Bank. The Shanghai stock exchange dynamics remains to be the most peculiar. In spring 2015, there was a take off followed by a collapse in summer. The regime authorities intervened to stop it but pointed out they are not going to get involved to the same extent next time. This means that global shocks may become fatal.
The CRB spot index characterizes the situation in this market segment perfectly. Adjusted for real inflation (not manipulated statistically), it is now the weakest in all of the 60 years of observation. What is more, the dynamics remains negative during this period, and the next reduction wave continues since the beginning of 2011. In 2015, the commercial metals went half price on average as well as energy sources (oil, gas, coal and even ethanol – that’s what she said!). If one considers that in 2014 they were falling even tougher, the dynamics impresses more. Precious metals and food are more steady though being comparatively weak with some rare exceptions (as natural disasters influenced a number of food products in major producing countries, reducing offer and increasing the price by the end of the year – like sugar and oranges).
Oil prices have been the main intrigue in 2015, especially for Russia as its whole economy feeds of oil. Current prices in the segment fell below the equilibrium, so that the adjusting is inevitable. The question remains when and what the level boundaries are. The process may start soon (the first half of 2016) and somewhere in 30 dollars per barrel or a little below. Possible path may be 32-35 in January, 40-45 in February, 30 in April-June, further growth with the peak in 2017/18. Russian goal is at the top of 60-70. However, it seems that prices will go higher only in cases of various disasters in the Middle East. Such events should not be excluded, given the growing chaos in the world, but, apparently, their impact on the market will not last for too long.
The fundamental basis of such expectations lies in that a lot of manufacturers have already sacrificed at a loss from operating activities (the price went below cost, even not taking into account investment, debt service and other ancillary expenses). Bankruptcies in the sector have already come about, but are not yet common due to an obvious reason: the miners hedge risks in derivatives (about a year in advance usually). In fact, it turns out that they do not sell oil at the current price but at the approximate of the previous year. This means that up to summer 2015, they traded at 100 USD per barrel (a year earlier price), but then business went much worse as the year ago the price hovered around 45-60.
Low-rated borrowers in the sector acquired big rates for their debts, but no catastrophe is to come as small companies will go bankrupt and be absorbed by large ones, which have no financing problems. The process is likely to take a couple of years. Then the market will be simplified: the prices arousal beyond 60 will generate aggressive shale mining resuming, pushing quotes down again. Right now this doesn’t seem possible as the smaller companies simply do not have enough money to increase production. But the above mentioned segment repartition will make such a yo yo almost automatic. It turns out, the market will return to the situation of the 1990s adjusted for the real inflation. The average prices of Brent (19.0-19.5 dollars per barrel) of those years are approximately equal to the current 45-50 which is only slightly inferior equilibrium of 50-60.
Asia and Oceania
In 2015, China’s economy continued to slow down. Due to common statistics manipulation, the official 7% GDP growth really means no more than 3-4%. The same allowance needs to be made for other indicators, like investment, manufacturing, retail, etc. One way or another, the current numbers are close to 2008/09 lower bound estimates and may go beyond to the values on 1980s. All these processes will continue bit by bit if nothing extraordinary happens. The collapse is possible in any time due to many China-specific reasons.
For example, carry trade (prodigious in previous years) – that’s when cheap loans were made in UA dollars with a view on the yuan growth. Now it falls and the borrowers suffer, putting it lightly. In general, the aggregate loans in the country are excessive – the money multiplier has exceeded 20 which will come to no good. Soft landing here resembles a miracle. Anyway, the authorities try to do as much as they can switching from the external demand to domestic at an accelerated pace. The most optimistic scenario, however, anticipates the replacement to be partial, so that the yuan liberalization to float freely (to balance foreign trade) seems reasonable.
In past years, China has been the major growing country in the region. Its slowdown has caused grave consequences on the continent, including Japan and Australia. Large Central Bank emission sustained the economy of Japan which only helped in gear with sales taxes raise in the spring of 2014. However, such help looks good on paper only, and in fact, the country is already stagnating. Australia is still growing (lots of resources, not so many people), but as world commodity prices go down the progress may be desrupted.
The same is true for New Zealand (suffering from cheap milk). Southeast Asia slows or even falls. Only India looks good thanks to the reforms of the new government: but their capacity is very limited. The situation in the region remains complicated.
Quantitative easing program launched by the ECB in the beginning of the year lowered euro significantly and thus, cheered economy of the Old Country. But monetary games are unable to adjust the fundamental imbalances in the economy and the slowdown became apparent in the next half of the year. It was especially visible in Britain with previously powerful progress. Spain slowed down as well. German and especially France showed more than a modest growth. Unemployment still continues to grow in France. Given the statistical manipulation in figures, stagnation is more believable. The next growth impulse may be received if euro goes down again. But it is only probable if no new force majeure (like Greece) happens as many countries pose a threat here.
All other factors remain negative: the Euro-bureaucracy, socialism, refugees and migrants, the slowdown in China, all kinds of sanctions, etc. Pro-US forces regard TPP to render a long-term positive influence as it is a free trade zone which can become a tool to separate first-sort countries from the, say, unwanted ones. But the negotiations with the United States are tight. At the same time, local patriots predict TPP to become the end for Europe’s economy, but due to increasing acts of terrorism and war, they may want to fence themselves off and finally let the partnership be.
The United States place their stake on TPP. The power of the left thought here is much lower than in Europe. Though local producers are not absolutely thrilled about the trade union with the “cheaper” countries of Latin America and East Asia prospects, but they are ready for that. The main US economy growth accelerators reversed dramatically. By the end of 2014, primary sector annual growth reached 15%, then a year later the result was of minus 10%. And that despite the fact that the decline in oil and gas production is relatively small – most of it to follow later. Construction pace also slightly dropped compared to the middle of 2015. But now the industry has faced certain demand constraints: the prices are too high for the population, and constructors (along with homeowners) are not willing to sell cheaper not to lose profits as they are already pruning on the materials quality and everything else.
Meanwhile, the income of ordinary Americans is still very weak, real per capita wages and spending hit abysmal low at the level of 1950/60’s (read big city survival tips). This significant decline is not reflected in the living standards level just because all those indices don’t show the amount of goods possessed by people but rather their turnover. Its reduction means only that the gadgets, vehicles, housing and other benefits are less likely to be renewed or upgraded compared to the past. But these benefits still remain at the households disposal in about the same amount. Productions moving from outside the US back within has slowed down due to the expensive dollar, but the overall process keeps going. Nevertheless, the US economy experiences a stagnation now, what greatly hinders the Fed from monetary tightening. Acceleration perspectives are not viewed. Apparently, in 2016 economy sleepwalking is to be continued with perturbations being possible at the end of the year due to the presidential election, but hardly particularly turbulent.
At the same time, some may envy similar dynamics. Though Mexico as a whole has managed to adapt to the oil collapse, other regional monsters look much sadder. Canada’s GDP falls and has already gone into the annual negative. In view of statistical manipulations, its size in real per capita terms is great – around 3-4%. Brazil’s situation is near to disastrous. Its industrial production dropped by 11.2% a year (lower bound since May 2009); consumer prices struck + 10% per year (the first time in 13 years); GDP has fallen by 4.5% per year in July-September (it’s the first time during observation of the last quarter century). Apparently, a power shift in this country is only a matter of time – just as likely as in Argentina and Venezuela. Thus, economic collapse in several countries has a chance to stop.
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