24 October 2016
Financial markets could face more rough weather next year as economic uncertainties will continue. Photo: CNSA
Financial markets could face more rough weather next year as economic uncertainties will continue. Photo: CNSA

What lies in store for markets in 2016?

With 2015 drawing to a close in three weeks, I’ll make some educated guesses on what might happen next year with regard to the global economy and financial markets.

The predictions are based on known data. However, please be warned that these projections are subject to changes if there is a massive stimulus program from Beijing or if the downward pressure on China’s economy is alleviated in the short term through other means.

The US dollar index might hit 108: The strength of the US dollar is set to extend into 2016, and the greenback might stage a new round of one-way rally during the year.

The Federal Reserve would be moving in opposite direction from European and Japanese central banks with regard to monetary policy. That would lead to a strong dollar. Also, there might be financial turmoil next year stemming from emerging markets, which would also trigger capital flight to quality and push up the greenback.

Technical analysis shows that the US dollar index might test 108 if it breaks the earlier peak of 100.33 and moves up further to a key resistance level of 101.5.

Commodity prices will continue to suffer: As the US dollar gains further strength, disappointing global economic growth will dwindle demand for raw materials and weigh on commodity prices. As many commodities are priced in US dollar, the dollar strength will be a drag for raw materials.

Crude oil price has already tumbled below US$40 per barrel, and the CRB commodity index has slumped to a 13-year low. It’s even lower than the level seen during the 2008 financial crisis. Speculators are having unusual net short positions in 18 commodity futures at present. The commodity market is set to go through a rough patch in 2016.

Meanwhile, US economic recovery might witness an inflection point, which might increase the risk of global recession amid China’s flagging growth.

Oil price is a key thermometer for global economic health. Continued fall in energy prices is a reflection of the sluggish world growth. The Baltic Dry Index has tumbled to a historical low in late November, in a sign that the global economic growth outlook is worrying.

Corporate sales will remain under pressure: US, the best-performing developed economy, has shown some signs of trend reversal. Corporate sales and earnings growth both fell back this year, and may deteriorate further next year due to a strong US dollar.

The net profit margin of S&P 500 index constituents has dropped to 8.40 percent recently from 9.65 percent in the fourth quarter of last year, meaning a fall of 125 basis points. Historical data of over four decades shows that as long as the net profit margin drops by more than 60 basis points, US economy is in the middle of, or will enter into, a recession.

Rising risk of disinflation or even deflation: The trend started to emerge after 2011 when commodity prices leveled off. As many as 27 percent of world’s 187 nations have posted negative inflation, and more than a fourth recorded low inflation of zero to 2 percent.

In this case, more than half of these nations have either deflation or disinflation. The trend is poised to continue next year. That could trigger a vicious cycle and exert a drag for global economy as well as US growth.

2016 could be a volatile and unusual year. Have you buckled your safety belt?

This article appeared in the Hong Kong Economic Journal on Dec. 10.

Translation by Julie Zhu

[Chinese version中文版]

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Hong Kong Economic Journal chief economist and strategist

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