China continues to spark panic in global markets as equity sell-offs over the last week, have spilled over into European and US markets. It may not be long before investors come to a conclusion that global growth is becoming stagnant.

The UK was the latest country to feel the consequences yesterday as manufacturing production data came in a mere -0.5%, below expectations of a 0.1% monthly gain. As commodity prices take most of the blame for the domino effect affecting global markets, one may ponder whether raising interest rates is the right path to take.

We have observed the US Fed raise interest rates for the first time in a decade towards the end of 2015 and the subsequent data figures were far from convincing to justify a second rate rise, with the US labour market exhibiting strength but the housing and manufacturing sectors disappointing. Expectations, in fact, are already emerging that fewer rate rises will be conducted in the US in 2016 to the 4 implied by projections a few months ago. Rate rise expectations by the Bank of England were also pushed back to November 2016 following yesterday’s bleak data. It seems global policy measures will maintain a dovish stance in the coming year.

Even if rate rises are undertaken by the US and the UK, the most cautious outcome would be to do so gradually, otherwise both economies risk shooting themselves in the foot.

Commodity prices have wreaked havoc on emerging markets (EM) in 2015 and don’t look set to stop yet. The sharp depreciation of emerging market currencies vs the Dollar for one persists and has significantly increased the spread and default risk on many EM debt securities. The repercussions are spread globally as a number of countries in the developed markets are exposed to EM debt.

In my opinion Quantitative easing measures will yet again be a highlight for 2016. The Eurozone and China will undoubtedly further stimulate their economies and try find a fiscal solution to go hand in hand with the objective of getting growth back on track.

The likes of the US reverting to easing measures should not be written off just yet, even though they initiated their rate hikes. Although unlikely, if production and CPI data accompanied by increasing USD appreciation continue the direction they’re taking, the US could find itself in a recession at some point throughout the year, aggravating the headaches of all Federal Reserve members.

Let me not be pessimistic, however, and take the realistic approach. With Oil prices and interest rates globally at current levels, opportunities are arising for many new corporations to set up and operate on a global scale. The lag effect for such results shouldn’t be too far off and should OPEC reach a compromise this year to stabilize output, oil prices face an upside rejuvenation which will bring well needed fresh air to global markets.

 

This article was issued by Mathieu Ganado, Junior Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.  

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