Goldman Sachs’ 2016 Review (Crossword-Style)
By Tyler Durden
2016 was chock-full of surprises, both in markets and in politics.
As Goldman's Allison Nathan explains, the year began with a perfect storm of worries that had become all too familiar already in 2015. Oil prices plunged and fears of faltering growth and a sharp depreciation of China’s currency escalated, driving disruptive sell-offs in credit and other risk assets. Confidence in global growth faltered, particularly after an anemic US GDP report for Q1.
But oh, how the world has changed. Today, the price of crude oil is almost exactly double its January low in the wake of announced production cuts by OPEC and key non-OPEC producers (Russia). We expect WTI oil prices to move higher to a peak of $57.50/bbl in 1H17 as the cuts push the oil market into deficit and whittle down the current large inventory surplus. But we also expect shale producers to respond to the higher prices, implying limited upside from there.
The rebound in oil prices led to a remarkable turnaround in credit markets, with HY Metals & Mining and E&Ps returning 49% and 36%, respectively, YTD; default rates normalizing; and spreads no longer pricing recession risk. We expect a further moderate compression of spreads in 2017 given expectations of a generally positive macro environment, gradual improvement in credit fundamentals, and, of course, our somewhat rosier oil outlook.
And fears about China have generally receded into the background as Chinese policymakers continued an ambitious stimulus program that helped stabilize growth. A more dovish tilt by the Fed in response to the tightening of financial conditions caused by the Q1 sell-off also assuaged market fears. But we warn that China risk is not far from the surface.
Capital outflow pressures have resumed amid the renewed strengthening in the US dollar. And policies that re-ignited growth in the short-term have just increased concerns about the future, particularly as credit growth has climbed. These potentially destabilizing trends merit watching next year, despite our mainline view of orderly currency moves and a continued bumpy deceleration in Chinese growth. (Side note: Meeting growth targets will be paramount next year amid China’s leadership transition.)
It was not long after the market left China, oil, and credit concerns in the dust that political uncertainty took center stage—a place where it has solidly remained since. Brazil had its president impeached amid one of the country’s longest recessions/depressions on record; French primaries established an unexpected presidential candidate in former Prime Minister François Fillon; and Italy will enter the new year with an interim government following the resignation of Matteo Renzi.
And we’ve not forgotten about one of the biggest political shocks of the year (decade, century?!): the UK’s vote in favor of Brexit. The now infamous Article 50, which needs to be activated to formally start the UK’s withdrawal process, still has not been triggered, and likely won’t be before March.
Meanwhile, UK and EU priorities for their future relationship remain at odds, leaving market participants closely watching “soft Brexit”/”hard Brexit” swings in the headlines. That said, UK growth has proved remarkably …read more
Source: Goldman Sachs’ 2016 Review (Crossword-Style)
