Oil prices edged down on Friday but headed for their biggest annual percentage rise since 2009, with world stocks also up nearly 6 percent over the year despite concerns over China’s slowing growth and weakening currency.
Global markets have fared surprisingly well in a year marked by major political shocks, including June's Brexit vote and the unexpected election of Donald Trump as US president in November.
US stocks have hit successive record highs and emerging equities have rebounded 8 per cent after three years in the red . Wall Street looked set to add to those gains, with index futures pointing to higher opening levels . The Dow Jones Industrial Average was poised for its best annual performance since 2013.
Britain’s blue-chip FTSE 100 index closed up 0.3 per cent at a record high of 7,142.83 points after a pre-holiday half-day session, having rose more than 23 percent from lows hit immediately after the June 23rd vote to leave the European Union. MSCI’s world index, which tracks shares in 46 countries, was up 0.1 per cent on Friday, with many investors having booked profits off the benchmark’s 13 per cent run since end-June.
The pan-European STOXX 600 index was up 0.3 percent. Tokyo stocks closed lower, having erased most of the year's meagre gains after the yen surged 21 per cent against the dollar. But oil has been the star of 2016. Brent crude futures have bounced more than 50 per cent after three years of losses, thanks to output cuts by key crude producers. The benchmark fell 16 cents to $56.68 a barrel on Friday. Other commodities too have rallied, with zinc, steel and rubber posting annual gains of around 60 per cent after suffering heavy losses last year.
In a note headlined “The underdogs bite back”, asset manager Schroders said government bonds were the only major asset class not to have delivered positive returns in 2016, with equities and commodities receiving a boost from President-elect Trump’s $1 trillion economic stimulus plan. “Investors have bought into the Trump or reflation trade on hopes of stronger growth, rising inflation and higher interest rates. Risk assets are rallying, the dollar has strengthened and capital has flowed out of emerging markets,” Schroders told clients.
The year is also notable for the growing chorus of voices calling an end to the three-decade bond bull run. With inflation on the rise, US 10-year yields have hit two-year highs and the European Central Bank has signalled it will start trimming bond purchases.
The dollar pulled back 0.4 per cent on Friday against a currency basket but has strengthened in 2016 for the third straight year, recently hitting near 14-year highs.
Britain’s pound, which hit 31-year lows after Brexit vote, is closing 16 per cent lower against the dollar, its biggest yearly fall since 2008. Most analysts expect the greenback to rise further in 2017, along with US Treasury yields, with Trump’s policies seen boosting inflation and prompting the U.S. Federal Reserve to hike interest rates more frequently.
The euro, however, has fought back this week, rising to three-week highs versus the dollar, though the widening interest rate gap with the United States has seen it fall 3 per cent this year.
The single currency faces some key tests in 2017, with Dutch, French and German elections expected to see a lurch towards anti-establishment, anti-euro parties while concerns remain over the health of Italian banks. “Political risk shifts to Europe in 2017 with the risk of an upset in France or Italy potentially threatening a break-up of the euro,” Schroders wrote.
The other major risk on the horizon could be China, where the yuan has posted its biggest annual loss against the dollar since 1994 when it started trading. Fears are growing that capital outflows will spiral out of control, further weakening the currency, depleting foreign exchange reserves and possibly raising debt default rates.
Asset manager BlueBay noted that Chinese economic data remained solid, capital flight would be a major concern and “a dislocation in China remains the most likely driver of a market reversal.”
Bloomberg
