16 January 2017
December closed out a year that, like a Melbourne day, offered the full range of conditions.
Global share markets started 2016 immediately in trouble, as worries over softening global growth turned into actual fear of recession. That did not eventuate, and markets recovered, but mid-year, the shock vote by the United Kingdom electorate to leave the European Union sparked another slump.
When markets had recovered from that, the equally stunning vote by the US electorate in November to install Donald Trump as the 45th President of the United States briefly sent them plunging again, before a bounce on the prospect of economic stimulus and a revival of ‘animal spirits’ in the US economy propelled the three major US indices to record highs in December.
Markets surge into year-end
The Dow Jones Industrial Average completed its best year since 2013, gaining 13.4%. The blue-chip benchmark gained 3.3% for December and 7.9% for the quarter. Over the year the Dow Jones outpaced the broader S&P 500 index, which gained 9.5%, and the technology-heavy Nasdaq Composite Index, which added 7.5%. The S&P 500 index was up 1.8% in December and 3.3% for the quarter, while the Nasdaq Composite put on 1.1% in December and 1.3% for the quarter.
In Europe, the Stoxx Europe 600 index closed the year 1.2% lower, its first yearly loss since 2011. In December, however, the benchmark jumped 5.7%, powering a 5.4% rise for the quarter.
Germany’s DAX 30 index gained 7.9% in December, to be up 9.2% for the quarter and 6.9% for the year. France’s CAC 40 index advanced 6.2% in December, making a 9.3% gain for the quarter and a 4.9% rise in 2016.
The U.K.’s FTSE 100 Index was up 5.3% in December and 3.5% for the quarter, on its way to a 14% gain for 2016, its strongest performance since 2013 and the biggest gain of all major European benchmarks. The FTSE 100 ended the year at a record high of 7,142.83 points.
In Asia, Japan's Nikkei rose 0.4% in 2016, which does not sound impressive, but marks the fifth consecutive annual increase, and the highest year-end close in two decades. The Nikkei added 4.4% in December, 16.2% in the year’s final quarter, and an impressive 22.7% in the second half of 2016.
The Shanghai Composite index surrendered 4.5% in December, nipping in the bud a mini-recovery that saw it gain 3.3% for the final quarter. Overall, Shanghai slumped 12.3% for the year, dragged down by factors such as capital flight, a crackdown by Chinese regulators on leveraged purchases of stocks by insurance companies and a slumping currency – the yuan fell about 6.5% against the US dollar for the year.
Hong Kong’s Hang Seng Index likewise had a tough end to the year – down 3.5% in December and 5.3% for the quarter – but managed a 4.3% gain for 2016.
Commodities boost local market, currency
At home, the Australian share market recorded its best annual performance in three years, with a 7% gain in the S&P/ASX 200 index, which was augmented to 11.8% with dividends. The Australian market’s global mining giants powered the index, with the biggest contributors to its rise being BHP, which gained 40% during the year, and Rio Tinto, not far behind on 34%. The index’s biggest gainer was APN News and Media, which surged 441% after News Corporation bought its regional media arm for $36.6 million.
The Australian dollar ended the local trading year at US72.4 cents, virtually unchanged from its US73 cents starting point in January. However in between, the currency endured a volatile year, trading between US68.24 cents and US78.35 cents.
On the commodities front, oil surged 51.6% (Brent) and 44.8% (West Texas Intermediate), and gold gained 9% in US$ terms, despite a 12% slump in the final quarter. But the commodity prices most important to Australia – in terms of the Federal Budget – are the bulk commodities, and it was an even better year in those: thermal (electricity) coal prices more than doubled to above $US100 a tonne; coking (steelmaking) coal more than tripled in price over the year, to more than US$300 a tonne; and iron ore doubled in price in the second half of 2016, to about $US80 a tonne.
Markets’ performance masks early-year fears
So, on many measures, 2016 was a good year – if you had been in a coma and woken up on the first day of 2017 to see these market gains.
The ride throughout the year, however, was anything but smooth – in fact, it looked at several stages through the year as though markets were heading over a cliff.
Plunging share prices in China and a meltdown in oil prices got the year off to the worst possible start: the Chinese market was down more than 20% within a fortnight, and other global markets sank with it. With January less than half gone, most major world markets were down by more than 10%, in ‘correction’ territory.
The Australian market held out a little longer, but less than six weeks into the year, the S&P/ASX 200 index was down by just over 11%.
Make no mistake, things looked dire in early 2016. At one point in January, crude oil was down an alarming 28%, to a 12-year low of US$26 a barrel, and seemingly pointing to a deteriorating global economy.
An extraordinary strategy note issued in early January by the Royal Bank of Scotland, saying it was time to “sell everything”, did not help investors’ confidence. RBS warned in the note of a “cataclysmic year” ahead for markets, and advised clients to “sell everything except high-quality bonds.”
But seemingly out of nowhere, prospects of a supply cut from the members of the Organisation of the Petroleum Exporting Countries (OPEC), surprise economic stimulus in China, backed by a program of closing unprofitable steel capacity and mines, lifted commodity markets, and share markets in their turn.
Toward mid-year, the stock markets began to focus on the lead-up to the referendum on the United Kingdom’s European Union (EU) membership. Britain’s eventual vote (in late June) to leave the EU stunned the markets, and gave rise to spectacular market gyrations. The referendum result saw the UK pound plunge 11.3% against the US dollar to levels not seen since 1985, and the UK stock market fall 8.7%, flowing into sharp falls in Europe and the US.
However, markets quickly recovered their stride, on the back of improving US and Chinese economic indicators, before the impending US election took over as the biggest game in town. The tightening of the Presidential race in October unnerved the US markets, but that was nothing to the chaos that ensued when the brash Republican challenger, Donald Trump, stunned Democrat front-runner Hillary Clinton with a victory that very few media pundits had predicted, right up to the close of the polls.
Trump’s victory saw the futures market versions of the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite indices each fall 4.5 per cent–4.6 per cent, almost forcing the suspension of futures trading. On election night itself, seeing these falls, eminent US economist Paul Krugman stated that markets would “never recover.”
Fortunately for frightened investors, the US markets actually rose the next day – as they began a post-election bounce that added about 8% through to the end of the year, and saw all three major US indices hit record highs in December, with the Dow Jones repeatedly coming within 0.1% of the milestone level of 20,000, although it failed to crack it.
Looking ahead, analysts are focusing on the likely content of Trump’s policies when he’s inaugurated on January 20. The effects of his policies on inflation and bond yields will be important, but gradual rises in bond yields are not expected to hurt the equities rally.
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