December 2016

• Global markets ended 2016 strongly in December as improving economic data, rising inflation expectations and accommodative monetary policy supported investor confidence.
• The Federal Reserve raised interest rates for the second time since the financial crisis and signalled a faster pace of tightening for 2017.
• U.S. equities continued their post-election rally, led by financials and cyclical sectors.
• European and Japanese markets advanced modestly, supported by improving global growth expectations and continued central bank stimulus.
• Emerging markets stabilised after November’s volatility, although a stronger U.S. dollar remained a headwind.
• Commodity prices strengthened further, particularly oil, following confirmation of OPEC and non-OPEC production cut agreements.

Asia (ex. Japan)

Asian markets outside Japan were mixed but generally stable in December as investors adjusted to rising U.S. interest rates and a stronger dollar environment. Chinese authorities continued to manage liquidity carefully while attempting to balance financial stability with the need to sustain economic growth.

Export-oriented economies such as South Korea and Taiwan benefited from improving global trade and technology demand, while India experienced temporary disruption following the government’s demonetisation initiative introduced in November. Despite this, broader regional sentiment remained constructive due to improving global growth expectations.

Europe

European equities posted modest gains in December as improving global economic sentiment and continued ECB stimulus supported markets. Financial stocks benefited from rising bond yields and expectations of reflation, while exporters continued to gain from the relatively weak euro.

The European Central Bank extended its asset purchase programme but reduced the pace of monthly purchases beginning in 2017, signalling cautious confidence in the region’s recovery. Political uncertainty remained present ahead of upcoming elections in several member states, though markets remained relatively calm.

United States

U.S. equities continued to rally in December as investors remained optimistic about the incoming administration’s plans for tax reform, deregulation and infrastructure spending. Financials, industrials and small-cap stocks continued to outperform amid expectations of stronger nominal growth.

The Federal Reserve raised interest rates by 0.25% and indicated that additional hikes were likely in 2017. Treasury yields moved higher following the announcement, while the U.S. dollar strengthened further against most major currencies.

United Kingdom

UK equities advanced in December as sterling weakness continued to support large multinational companies and exporters. Domestic economic data remained more resilient than many had anticipated following the Brexit referendum earlier in the year.

The Bank of England maintained its accommodative stance and signalled that inflation would likely rise above target due to currency depreciation. Gilt yields rose alongside global bond markets as reflation expectations strengthened.

Japan

Japanese equities gained in December as a weaker yen and rising global bond yields supported financials and exporters. Investor sentiment remained constructive due to expectations of stronger global growth and continued policy support from the Bank of Japan.

The Bank of Japan maintained its yield curve control framework and accommodative monetary policy stance. Domestic inflation remained weak, but improving external demand and stabilising global conditions supported corporate earnings expectations.

Emerging Markets

Emerging markets stabilised in December following the volatility seen after the U.S. election. While rising U.S. interest rates and a stronger dollar remained challenges, improving commodity prices and stronger global growth expectations helped restore investor confidence.

Commodity exporters benefited from higher oil and industrial metal prices, while Asian economies remained relatively resilient due to stable domestic demand and ongoing policy support from China.

Commodities

Commodity markets strengthened further in December, led by oil prices after OPEC and several major non-OPEC producers formally agreed to production cuts aimed at reducing global oversupply.

Industrial metals continued to rally on expectations of stronger infrastructure spending and global reflation. Gold prices weakened as rising U.S. interest rates, higher bond yields and a stronger dollar reduced demand for safe-haven assets.