Some of these may be obvious to the seasoned trader, some less so. But what is certain in the financial markets is that 2016 is already setting itself up to be a highly volatile year for traders of CFDs, forex and other contracts. It does not look as if it will be a smooth trip, by any means.
The falling price of crude oil, which slipped below $40 / barrel at the end of last year, is good news for motorists, but bad news for oil producers. It seems hard to believe that the cost of crude will fall further, but OPEC does not seem to be in a rush to turn off the taps. US oil rigs are being turned off, but other producers, including Russia and Venezuela, still seem too desperate to restrict production. In the meantime, US strategic oil stock have been increasing over 2015, well above their five year average. Only increased political risks in the Middle East would turn oil around, but with relations between Iran and the US seemingly warming up, that does not look likely in 2016.
Understand the fundamentals and economic factors that affect Crude Oil pricing.
A stronger dollar
With the recent move by the Federal Reserve to increase rates, many analysts were expecting apple carts around the world to be upset. We may not have seen all the medium term impacts of that yet. The rule of thumb is that US equities outperform during periods of dollar strength. In common currency terms, there has been a clear correlation between the US equity market relative performance and the real trade-weighted dollar, with both moving up together. In addition, the US equity market often acts as a safe haven, while other markets are comparatively procyclical. Look for some catchup potential for some other developed market indices, including Germany, Japan and Sweden, as well as some Asia bourses (but not all).
Understand the fundamentals and economic factors that affect the US Dollar pricing.
In the 1990s we grew used to the idea of middle-of-the-road, consensus government in Europe. Today the rise of radical politicians in many European countries and further afield is creating waves. Markets and traders worry about the prospect of a sudden political victory along the lines of Syriza’s success in Greece at the start of last year. That set off a drama of shuttle diplomacy and brinkmanship as the Greek government sought to renegotiate its debt obligations, with wider consequences for the Eurozone. The UK is mulling a referendum on its own EU membership within the next two years, Catalonia would like to break away from Spain, and even within Germany and France right wing parties will be pushing for more power in 2016. All this will inject further uncertainty into the EUR’s performance.
Understand the fundamentals and economic factors that affect the EUR pricing.
Interest in trading the price of China’s most important market index has been increasing steadily in 2014-15. Growth in China has been slowing down and there remains a lack of transparency on how China’s economy is really doing, especially the health of its banking sector. The Chinese financial regulators will be moving to address this behind the scenes, as they continue to navigate the rapid evolution of their country from centrally planned to market economy. This is no easy task, and will likely produce further upsets in the Shanghai market. We will see more conservative numbers from the Chinese economy this year, and plenty of unwarranted hysteria from foreign analysts. We expect more brokers in Asia and even in Europe to introduce more pricing for China-linked assets in 2016, but watch out for liquidity traps at times of extreme market turbulence.
We are seeing something of a dichotomy in the approach of central banks around the world. The move by the Federal Reserve to raise rates will not necessarily be echoed by other central banks. For starters, the Eurozone is not in nearly as good a state as the US. This will create stresses in the EUR/USD pair in 2016, which many macro and currency-based fund managers will be hoping to exploit. Similarly, we will probably see the Bank of England raise rates too, despite worries about Brexit, which will be hitting sterling all year long or until a referendum is finally held. As central banks diverge from their closely choreographed movements of the past few years, expect some big swings in currency prices this year.