The final trading session of 2014 is upon us; the year finishes with record highs for US indices, and a bear market in Oil. As the year ends, there has been resurgence in instability in Libya, a near collapse of the Russian Ruble and heightened tensions from North Korea.
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What does 2015 have in store?
Below is a brief overview of some of the major themes in the financial markets in 2015.
Oil has been the unexpected trade of 2014, at the start of the year the concern for 2014 was for a move higher to $150/barrel, not the $50 handle which crude is currently trading. Oil has traded to a multi-year low, and without a cut in production, the oversupply is likely to push the black gold lower in the short term.
For oil producing nations that rely on oil for revenue, the collapse in the price is a major risk to the stability of the economies (Russia, Iraq, Saudi Arabia etc.) For net oil importers, and oil users, the reduction in price is welcomed reprieve following the economic crisis. Lower prices once trickled through to the pump, will contribute to lower inflation, and increased personal expenditure on other items, a well needed boost to the economy.
The longer term outlook depends on regional stability of the primary producers (MENA) and the output levels agreed by the oil cartel OPEC. A reduction in supply, should lift the price, however further disruption of supply due to instability would see oil trade significantly higher.
End of 2015 target: $75/barrel (Brent)
China / RMB
During the global financial crisis, China has been seen as a beacon of hope, as well as the potential catalyst for collapse. The Chinese economy has grown at a pace unfathomable by western economies, with a insatiable demand for raw materials to fuel growth. This demand has underpinned global growth, with Chinese money flowing internationally. Such has been the importance of China, it has regularly been cited as the risk to the global recovery. As the Chinese economy has slowed down, the PBOC, surprised analysts and cut interest rates.
London became the first clearing bank outside of Asia for the Chinese currency (RMB). This is an important step in the gradual move for globalisation of the financial markets in China. In 2015 further steps are expected which would eventually lead to a free-floating RMB. The opening of the Shanghai-Hong Kong stock connect in November was seen as land mark moment for China, and confirmation that China is opening up.
The risk for China is the reliance on credit to fuel the economy’s growth. Analysts have cited the bubbling property prices, and the concerning high levels of non-performing loans.
Sterling has traded in a trend since the end of Q1, reaching a multi-year low against the greenback in the final quarter of 2014, just below 1.55. The outlook for the first rate rise by the Bank of England, isn’t likely to happen in 2015; inflation is below the 2% target and the concern over a housing bubble is easing. Analysts have pushed back expectations to Q1 2016, however a 25bps rate rise should have minimal impact; it is the direction of tightening which is key.
The UK general election (7th May 2015) is the major risk to the stability for Sterling. This election isn’t expected to have a single majority winner, with the risk of a hybrid coalition with multiple potential combinations. The coalition talks could be drawn out, with uncertainty weakening Sterling. Once formed; the risk of an unworkable parliament leaves the UK economy as a risk for foreign investment, with uncertainty over the government’s future policy.
End of 2015 target: GBPUSD 1.4750
Here is a recap from last year’s blog, looking ahead to 2014; Goodbye 2013, Hello 2014 with a focus on the Eurozone and China.
From all of the Abshire-Smith team, we wish you a Happy New Year and best of luck in your trading in 2015.
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