Key Trading Ideas for Financial Markets in 2016

Saxo Bank, a specialized bank for online trading and investment, published its quarterly global forecasts ‘Essential Trades’ on Tuesday, featuring key trading ideas for financial markets in 2016.

The main event, a sort of paradigm shift, occurred in the last weeks of 2015 when the U.S. central bank, the Federal Reserve, finally raised interest rates for the first time in nine years. Saxo Bank’s forecasts for the first quarter of this year are therefore cautionary and focused on reassessing how different assets react during the interest rate hike cycle.

– The first quarter will be a tough start to a year that will be dominated by confusion, increased volatility, and the Fed still probing its positions. The broader picture, however, shows that we are transitioning to a marginal cost of capital model, and that is good news, commented Steen Jakobsen, Chief Economist at Saxo Bank.

– The Fed’s rate hike is a sign of healing, not illness, and the year will offer numerous opportunities for investors seeking the right ways to maintain portfolio growth while the market is being sorted out, concludes Jakobsen.

Given such an environment, Saxo’s forecasts for major assets in the first quarter of 2016 are:

Commodities

The first quarter is likely to be the worst quarter for the already beleaguered price of crude oil. The lifting of sanctions against Iran will increase their exports, starting with oil that Iran holds in storage on supertankers, followed by 500,000 barrels of daily deliveries to an already oversaturated market. In the U.S., inventories typically rise during the first four months, which will create additional pressure on Cushing, the hub for WTI crude oil futures. The first quarter will also be very challenging for precious metals, with investors viewing the environment of higher interest rates in the U.S. and the continuation of quantitative easing programs in Europe and China as an opportunity to buy dollars.

Forex (Currency Market)

As the Fed has begun to adjust its interest rate policy, forecasts for the global market and all currencies, both small and large, now depend more than ever on new Fed rate hikes and adjustments of market expectations to the pace of those hikes. The dollar is expected to rise as the Fed leads the unwinding of an incredible long-standing easing policy since the onset of the global financial crisis.

Bonds

The credit factor is the main theme attracting the attention of investors worldwide since the beginning of the new year. With interest rates having risen from zero, the cost of borrowing will shape the business environment of national and corporate budgets. In the event of any positive economic surprises during the first quarter, it would be logical for investors to add a short position in bunds (German government bonds) to their portfolios.

Stocks

Our forecasts indicate that there will be no spillover of cuts in borrowing from the energy and mining sectors to the stock market, so 2016 is likely to be a good year for investors as they face a flatter curve in dollar yields, negative interest rates on government bonds in Europe, and even for those with five-year maturities as well as on short-term government bonds in Japan.

Macro

The global economy will withstand the pressure of the first interest rate hike in the U.S. in the last decade, but forecasts are biased towards developed economies and far from emerging markets. However, the consequences of rising capital costs are not solely negative for now, and although very weak, global growth will increase.

Europe

Poland has long had a reputation for being a solid and well-developed economy, resilient to recession. Unfortunately, it remains extremely sensitive to higher capital costs, especially when looking at the energy sector. We believe that the growth of the Polish economy will be shaken in 2016.

Asia-Pacific

The first quarter is marked by the beginning of the Chinese New Year, symbolized in 2016 by the sign of the Fire Monkey, so accordingly, we are expecting a year that may be marked by additional damage to markets, ambitions, and even greater volatility. Confusion and fragmentation will be even more severe, with geopolitical risks high on the list of expectations as well as possible global slowdown in an already challenging environment.