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Volatility & Uncertainty to Define 2016

Major challenges facing market participants

The list of the major challenges facing market participants as 2015 comes to a close is quite diverse and suggests a volatile picture for various asset classes. In this report, we identify the key economic drivers for Q4/2015 and full-year 2016, with a short commentary on how they may impact prices and market volatility. Our review will include the United States, China, Japan, Europe, emerging markets, energy, and agriculture. Here is the summary.

US growth remains modest, inflation subdued, and an eventual Federal Reserve rate increase is more likely to flatten the yield curve than result in a parallel shift upward in the yield curve.

Fig.1 US Annual Average Real GDP Growth
Source: St. Louis Federal Reserve Bank Fred Database (GDPC1). Estimates for Q3/2015 - Q4/2017 by CME Economics.

China’s growth deceleration continues. Most of the impact on global growth and commodity markets has already been felt. The Chinese stock market reacted in 2014 and through June 2015 to Government stimulus (i.e., new loans, lower rates) and not to the sluggishness of exports. Since July 2015, equities have been moving back in line with fundamentals. Further weakness in the Chinese currency (RMB) is likely, as a reflection of slow export growth, although it will not help exports grow any faster. Only stronger global growth will get Chinese exports moving again.

Japan is hardly growing and has no sustainable inflation pressure despite a drop in the yen from 80 JPY/USD in 2012 to around 120 in 2014-2015. Further yen weakness remains a strong probability.

Europe may post small gains in real GDP for 2015 and 2016, after three years of stagnation. Still, the European Central Bank (ECB) is expected to hold rates low and continue to expand its balance sheet after allowing it to contract during 2013 and 2014.

Emerging market countries are struggling with rising political risks and economic stagnation or only modest growth. Currencies have felt the downward pressure. When global equities signal a “risk-on” environment, however, a recovery in emerging market currencies may be quite strong.

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About The Hedge Fund Journal

INFORMING THE HEDGE FUND COMMUNITY With access to some of the industry’s biggest names and an astute and talented group of writers and contributors, The Hedge Fund Journal has established itself as a trusted source of information on the hedge fund industry. Highlights of Issue 108: BlueCrest - Equity strategy excels in 2015 Volatility & Uncertainty to Define 2016 - Major challenges facing market participants On Origins of Alpha - Is the stock market a quasi Ponzi scheme? InfraHedge - The largest MAP-infrastructure provider