As you turn the last page of 2015
January 05 2016 11:04 PM
K V Samuel
K V Samuel

By K V Samuel

As you turn the last page of 2015, let us have a brief look at the fireworks happened in the Global Financial markets in 2015. Some commentators would prefer to brand 2015 as a “mad year” in terms of financial markets turmoil; however, I would prefer to term it as a moderate year, except a few fireworks here and there, which most of the traders might have enjoyed.
First  two most surprise moves that took place was in January, where in the Swiss National Bank (SNB) removed its Swiss franc peg cap against the euro and the European Central Bank (ECB) announced a sovereign QE programme.  
On January 15, when SNB de-pegged franc from euro, with in an hour USD/CHF crashed from a high of 1.0221 to 0.7406 — a drop of about 27.54% — and EUR/CHF from 1.20106 to 0.85172, a drop of about 29.08%. Trading in CHF and CHF crosses were suspended for almost 30 minutes and subsequent quotes appeared in the trading screens were wide with almost 200-300 pips compared to normal spread of one pip. This resulted in some of the most astonishing price action ever seen in FX markets. Hundreds of millions of USD were evaporated/gained in minutes from/by several large investors/ speculators in CHF and CHF crosses. There was a real bloodbath and it took almost one week for the markets to become normal.
Also, Swiss interest rates were changed to negative — this was another smart move by the SNB.
The ECB announced a massive asset-backed securities purchase programme (ABSPP) totaling EUR 60bn per month and intended to carry out until at least September 2016. This resulted in negative interest rates scenario and euro dropped from about 1.21 in January to below1.05 in March.
In January, we also saw massive crash in commodities, especially copper; several Asian and European equities reaching multi year highs and record low yields in European sovereign bonds.
The Greek saga, which started in February, continued almost till July. Greek’s failure to make scheduled repayments to IMF and other creditors and the ECB closing their taps as a liquidity provider of last resort, aggravated the situations. Banks were forced to close for weeks.
“Grexit”, the term usually used for the potential exit of Greece from EU, was well-celebrated by the media.  Marathon negotiations with EU and other creditors, subsequent opinion poll and its outcome and the determination of EU leaders, especially Germany to almost bailout Greece, calmed down the turmoil by July and Greece was able to continue in EU.
Major commodities like crude, gold etc dropped to multiyear-lows in July. Chinese markets provided extra entertainment in July when the Shanghai Composite Index dropped nearly over 9% in a day.
From August onwards the focus was on the Fed’s first rate hike in almost a decade. “As Fed starts roaring…will emerging markets collapse?” was a very informative and in-depth analysis of the pros and cons of the potential Fed action published in Gulf Times on December 16. 
With current unemployment rate at 5% compared to 8% in January 2013 and 2,308,000 new jobs added in the non-farm sector in the first 11 months of this year, Fed chair Janet Yellen and her team strongly argued for a rate hike in December. However, GDP growth rate and other major indicators were mixed and still showing signs of sluggishness, which argued that potential rate hike might be symbolic and moderate only.
Global economic recovery, in general, is still moderate to sluggish and Emerging markets were worrying substantial investment outflows to US following the Fed’s move. Also, IMF has earlier expressed its view that a Fed rate hike in 2016 is more appropriate and desirable.
A 0.25% rate hike on December16, as expected, was moderate only and further US rate hikes in 2016 would be about 0.75-1.00 only, disappointed many market players, who were expecting further volatility before the year-end. 
What are the expectations of 2016? It’s a million dollar question. Dollar Index has rallied substantially higher from 78.90 on May 31, 2014, to over 100 recently, on anticipation that the US recovery might be robust and there might be substantial interest rate hike in the coming years. However, as per the latest indications, any US rate hikes will be moderate and gradual only in the coming years.  Weakness in economies elsewhere, especially Europe, may continue to support the dollar initially but may weaken moderately later in the year.
Equity markets are likely to rally in 2016, with Dow testing 20,000 and Nikkei 21,000 from the current 17,600 and 19,000 levels.
Most of the major commodities had fallen substantially in the past couple of years and buy on dips may be a better strategy for 2016. Crude (Brent) may drop to $ 25-30, but is likely to recover to 55-60 before the end of 2016. 


• K V Samuel is the executive manager for Treasury & Investments at Doha Bank. Any views expressed in this column are his own and not necessarily that of Doha Bank.

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