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The big events that shook financial markets in 2016

A series of big events shaped financial markets in 2016. Here is a selection of FT analyses and commentary, alongside charts, highlighting a tumultuous year.

The new year rout

January proved brutal for investors. After just 10 trading days, global equity markets had lost more than $4tn of value, with sentiment hammered by fears about China’s economic slowdown and a depreciating currency. In turn, bond markets were whiplashed by the conflicting forces of central banks selling reserves to support their currencies and investors rushing for safety.

As FT Markets covered the anxiety at such an early stage of the year, we cautioned that: “The global impact is painful but manageable, and far from enough to plunge the world into a new recession. After a difficult first 10 trading days of the year, this is perhaps the most favourable outcome for investors: one in which the problems they see do not disappear but are at least contained.”

Our Big Read: Markets: high anxiety — showed how bourses suffered their worst ever start to a year, but investors were discounting the risk of a recession.

Another key element of the new year weakness in markets was the slumping oil price. By the third week of January, Brent crude hit what proved to be a low for the year of $27.10 a barrel, escalating the selling of energy sector shares and bonds, particularly the junk-rated debt of US-based shale drillers. That prompted Saudi Arabia to describe $30 oil as irrational.

Then at the end of January, the Bank of Japan delivered another big shock to markets and banks, as it embraced a negative interest rate policy. The repercussions were immediate, as investors dumped the shares of banks, while Japan’s investors sought higher-yielding eurozone, UK and US debt. That helped drive down developed world market interest rates.

The Brexit vote

Once the dust settled after the market’s new year swoon and opportunistic investors swooped to buy the dip, so the drums began beating ahead of the UK’s vote on whether to remain a member of the EU. The Brexit vote was a genuine shock for markets, given investors had been confident that the UK would stay in the EU.

Ahead of the referendum, FT Markets highlighted that a No vote would result in a much weaker pound and also trigger a pronounced drop in government bond yields, anticipating a revival of quantitative easing from the Bank of England.

Here is our summary of a historic trading day that began in Asia as the pound buckled. “Something very bad has happened”, is how one Tokyo-based currency trader described it as we detailed how markets scrambled to keep up with the Brexit shock.

At the halfway stage of the year, we highlighted five opportunities and risks for global investors. Among the risks we pointed to at the start of July were those of a weaker renminbi and a stronger dollar hitting global markets. Brazil and Japan also featured in the ranks of risks and opportunities.

What next for markets this year: profit or peril?

Already in the spotlight in July, and still animating markets in December, were Italy’s constitutional referendum and the bad loans plaguing the country’s banks. Italy voted No to the reforms earlier this month, triggering the resignation of Matteo Renzi as prime minister. And the country’s banking shares remain deeply under water for the year.

The problem of ultra-low bond yields

Brexit and the BoE’s subsequent revival of QE was the final driver of the great bond rally that helped define 2016 in markets. By August, global benchmarks were at all-time lows, led by the 10-year gilt yielding a paltry 0.51 per cent, while Switzerland’s entire bond market briefly traded below zero.

By August, the universe of negative yielding debt had swollen to $13.4tn.

The biggest casualty of some $14tn of global debt trading below zero per cent were the pension and insurance industries.

FT markets covered the issue in depth with a later summer series: Pensions: Low yields, high stress.

Trumpflation swiftly overcomes market anxiety

After the shock of Brexit, investors approached the US election cycle with a degree of trepidation, but the smart money favoured Hillary Clinton. The shock of Donald Trump winning the electoral college vote for markets was shortlived — lasting a matter of hours — as investors rapidly embraced the idea of a Republican-controlled Congress being a game changer by implementing fiscal stimulus, tax cuts and rolling back on regulations for US business.

Soon the concept of Trumpflation took hold, whereby fiscal policy would super charge the economy and nurture inflation.

Suddenly the era of ultra low bond yields was in doubt, with the tally of negative-yielding debt slipping to less than $11tn this month.

Wall Street equities have motored further into record territory. And selling of bonds accelerated in the middle of the month after the Federal Reserve nudged borrowing costs higher and indicated a more aggressive pace of tightening next year.

Here’s FT Markets’ initial summary of the price action: Traders grapple with Brexit déjà vu as Trump triumphs.

The return of Opec as deal boosts the oil price

Booming share markets after the US election also reflected hopes of an oil production deal that eventually came to pass in late November when Opec met in Vienna. A subsequent agreement between non-Opec producers to also cut supply in December helped deliver a significant boost to crude prices. The big motivation for the deal has been the economic pain inflicted by a falling oil price on the economies of producers, notably Saudi Arabia. As the country looks to line up an equity flotation of state-owned oil company Aramco by 2018, keeping the price firmly above $50 a barrel is a crucial aim.

Here we charted the ambition of Prince Mohammed bin Salman al-Saud for a life for the Kingdom beyond oil.

China’s debt pile and weakening renminbi

As the year comes to an end, we’re examining the pros and cons of a weakening renminbi and hearing concerns about China’s vast debt pile. The risk of a more active US Federal Reserve in 2017 raises the stakes for emerging markets and the their dollar-denominated debt.

Further US dollar strength will hamper China’s efforts to stabilise the renminbi and limit capital flight, with the risk that the country raises short-term borrowing costs.

The challenge facing policymakers and investors in China was outlined in early December and overshadows the start of 2017: US interest rate rises set to expose China’s frailties — the world’s most leveraged corporate sector adds to the country’s vulnerabilities.

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