Aside from the previously noted FX fireworks early in the illiquid Asian session, which saw the US Dollar "flash crash" briefly against most pairs, including the Euro and the Swiss Franc...
... only to gradually recover most if not all losses, it has been a generally quiet session, as markets look to close out 2016 in orderly fashion. The MSCI World Index was flat on Friday, with investors having booked profits off the benchmark's 13% run since end-June and European shares opening a touch weaker. It was poised to end the year 5.7% higher despite a rough start and the worst January for stocks in history.
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 U.S. president in November. U.S. stocks have hit successive record highs and emerging equities have rebounded 8 percent after three years in the red. As a result, global stocks are set to close out the tumultuous 2013 with the biggest gain since 2013, ironically even as Japan’s benchmark Topix index and the Stoxx Europe 600 Index were set for the first yearly decline since 2011. Oil headed for its first annual climb in three years. A gauge of the dollar shifted lower after reaching the highest level in more than a decade earlier this week.
Quickly looking back at the year that was, equities posted a resilient recovery after tumbling at the start of the year. Political risk punctuated the calendar, with Britain’s vote in June to leave the European Union presageing Donald Trump’s victory over Hillary Clinton in November. As Bloomberg adds, the year for financial assets started on a sour note from the first day of trading, with the MSCI World gauge tumbling 2 percent. China-fueled turmoil sent stock markets from Tokyo to India into bear markets in the first two months of 2016. Oil reached a 13-year low while the dollar slid to its weakest level in a year. The second half of the year surprised many analysts, as financial markets powered past the Brexit shock while Donald Trump’s presidential victory provided an unexpected boost.
Ironically, every major political catalyst that had been dubbed a material market risk, materialized and the result was a surge in risk assets as markets no longer respond negatively to any adverse news flow courtesy of central bank promises to prop and support global "markets."
“2016 was perhaps one of the biggest roller-coasters driven by political events,” said Dmitri Petrov, a strategist at Nomura International Plc in London. “It’s not so much the actual realized volatility of asset markets, but volatility of market view around the global macro and policy outlook that made it exceptional.”
The yield on 10-year Treasury notes was little changed at 2.48 percent after dropping three basis points Thursday. It slid to 2.46 percent earlier in the week, the lowest since Dec. 14. U.K. gilts fell with the 10-year yield climbing 2 basis points to 1.257 percent. Yields are still on course for their first monthly decline since August.
Looking at other asset classes, Brent crude futures have bounced more than 50 percent after three years of losses, thanks to output cuts by key crude producers. The benchmark rose half a cent on Friday. Other commodities too have rallied, with zinc, steel and rubber posting annual gains of around 60 percent 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, U.S. 10-year yields have hit two-year highs US10YT=RR and the European Central Bank has signaled it will start trimming bond purchases.
The dollar pulled back 0.3 percent on Friday against a currency basket following its early "flash crash" 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 the June 23 vote to leave the European Union, is closing 16 percent lower against the dollar, its biggest yearly fall since 2008. Most analysts expect the greenback to rise further in 2017, along with U.S. 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 percent this year.
The single currency faces some key tests in 2017, with Dutch, French and German elections expected to see a lurch toward 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.
- S&P 500 futures up 0.2% to 2250
- Stoxx 600 down 0.3% to 359
- FTSE 100 down 0.3% to 7098
- DAX down 0.2% to 11431
- German 10Yr yield up 2bps to 0.19%
- Italian 10Yr yield up less than 1bp to 1.8%
- Spanish 10Yr yield up 1bp to 1.34%
- S&P GSCI Index up 0.3% to 399.6
- MSCI Asia Pacific up 0.1% to 135
- Nikkei 225 down 0.2% to 19114
- Hang Seng up 1% to 22001
- Shanghai Composite up 0.2% to 3104
- S&P/ASX 200 down 0.6% to 5666
- US 10-yr yield up less than 1bp to 2.48%
- Dollar Index down 0.62% to 102.04
- WTI Crude futures up 0.4% to $53.96
- Brent Futures up 0.3% to $57.03
- Gold spot up 0.2% to $1,160
- Silver spot up 0.5% to $16.24
Top Global News
- Trump Left a Tough Choice by Obama Sanctions on Russian Hacking: Obama imposed penalties on Russian intelligence officials and agencis, expelling 35 Russian operatives
- Qualcomm to Gain Fees From China’s Meizu in Lawsuit Settlement: Meizu will pay patent fees similar to those accepted by other Chinese phone makers
- Nomura to Deepen Cost Cuts as CEO Seeks to Keep Ship Afloat: CEO Nagai unveiled “Waterline Project” seeking to improve cost-effectiveness over the next three years
- NBCUniversal Says Channels May Go Dark in Charter Cable Dispute: Charter has been “unyielding” in demanding better terms, NBC says
- Oil Market Seen as Surprise Haven From Political Risk in 2017: OPEC output cut creates capacity to respond to supply outages
- Euro Jumps 1.6 Percent in Minutes as Algo Orders Surprise Market: Liquidity evaporated as euro buy orders surged above $1.05, currency pares gains
- Grab Your Ear Muffs, the New Year’s Arriving With a Frigid Bang: Warmer Arctic weather will spur a very chilly start to 2017
- China to Boost Coal Output Amid Capacity Cuts in 5-Year Plan: Coal output will increase to 3.9 billion metric tons in 2020, about 18% higher than this year
- Wall Street’s Trump Bonanza Won’t Avert Job Cuts at Banks in ’17: Even if profits surge, analysts say banks will keep automating
In Asia, stocks edged just barely higher with the MSCI Asia Pacific up 0.1%, while Japan’s Topix index caps its first annual retreat since 2011. 6 out of 11 MSCI Asia Pacific sectors rise, with health care outperforming and industrials underperforming.
Top Asian News
- Hong Kong Parking Garage May Fetch $2.2 Billion in 2017 Sale: First commercial land sale in central business district in more than 20 years
- Fairfax Wins Central Bank’s Approval to Take Over Indian Lender: Approval to buy 51% stake in Catholic Syrian Bank
- Japan Wants Its Overworked Citizens to Start Weekends Early: The country wants companies to let workers finish early on the last Friday of every month
In Europe, stocks are ending the year in a subdued fashion, falling fractionally some 0.3% in thin trading, and poised to end the year with the first annual decline since 2011. 17 out of 19 Stoxx 600 sectors decline, with real estate and household goods outperforming, oil & gas underperforming. 70% of Stoxx 600 members decline, 27% gain
Top European News
- Bank of Italy Says Paschi Rescue Will Cost State $6.9 Billion: Bank of Italy makes estimates in note posted on website
- Fiat Said to Be Developing Autonomous Vehicle: The Information: Report says co. already has prototype vehicles on the road
In commodities, the Bloomberg Commodity Index, which measures returns on raw materials, rallied 0.3 percent, putting it on course for a 12 percent advance. This would be the first increase since 2010. Crude futures gained 0.5 percent to $54.01 a barrel, after Thursday’s 0.5 percent decline. Prices are up about 46 percent this year. Supply cuts from OPEC and other producing nations next month are intended to stabilize the market and reduce swelling global inventories. Gold’s 0.2 percent advance to $1,160.55 an ounce extended its rally into a fifth day, the longest since Nov. 4. The metal has rebounded 3.3 percent from an 11-month low, and is up more than 9 percent for the year.
In currencies, the euro rallied as much as 1.6 percent before paring its advance to 0.7 percent and trading at $1.0566 as of 10:38 a.m. in London. The yen fell 0.3 percent to 116.8 per dollar, erasing an earlier advance of 0.4 percent. The currency was up more than 20 percent for the year in August, but has pared that to 2.9 percent. The Bloomberg Dollar Spot Index slipped 0.4 percent after dropping 0.5 percent Thursday, although it remains up 2.7 percent for the year. The pound was on track for a monthly decline versus the dollar, its ninth this year and wrapping up its steepest annual drop since the global financial crisis of 2008. Sterling was on track for a more than 16 percent drop against the dollar this year and was the worst performing Group-of-10 currency in 2016 despite the recent stabilization.
US event calendar:
- 9:45am: Chicago Purchasing Manager, Dec., est. 56.8 (prior 57.6)
- 1pm: Baker Hughes rig count