The Dow’s Trump-fuelled rally, the pound’s Brexit-led tumble, gold’s surge and Italy’s high youth unemployment – the year hasn’t been short of drama
Donald Trump had a marked effect on markets in 2016, denting gold, raising the Dow Jones and pushing the Mexican peso to an all-time low. Photograph: Carlo Allegri/Reuters
The price of Brent crude tumbled below $30 per barrel for the first time in 13 years at the start of 2016 as worries over a supply glut intensified. The lifting of sanctions on Iran in January meant the oil producer could ramp up crude exports into a market already awash with supplies thanks to high production from US shale oil and the Organisation of the Petroleum Exporting Countries (Opec). But prices recovered as the year progressed on signs of diminishing stocks and on growing expectations Opec would limit output. An agreement to cut supplies was reached at the end of the year between Opec and a number of non-members, sending oil to a 17-month high above $57. The price is up 54% over the year.
A tumultuous year in global politics boosted demand for gold – seen as a safe haven in troubled times – and sent its price soaring for much of 2016. Appetite for gold was also boosted by low interest rates. Investors could get little or no return on cash and other assets that pay interest and so instead sought out investments such as gold. The precious metal lost some of its shine after markets digested Donald Trump’s victory and the prospect of big government spending and interest rate rises in the US. As the US dollar and bond yields eased off in the final days of 2016, gold got a small fillip, ending slightly higher over the year as a whole.
The pound has tumbled since the EU referendum, hitting 31-year lows this year. A US interest rate rise in December led the dollar to extend gains against sterling. The pound is down around 17% against the dollar since the Brexit vote. Conversely, the FTSE 100 share index has soared to record highs. Much of the FTSE’s rise has been down to the pound’s weakness: many of the firms listed report in dollars and so their earnings are flattered by the currency movements. The weak pound also encourages international investors to pick up UK-listed stocks and other assets such as property.
The US stock index has soared to new highs in 2016, flirting with the 20,000 level. Worries about a potential wave of protectionism under president-elect Donald Trump have been more than offset by Wall Street’s hopes that huge infrastructure spending and deregulation will boost the US economy – in the short-term at least. Since the election, banks have been among the top risers on US stock markets, helped by rising interest rates and expectations that Trump will relax regulations.
The Baltic Dry index is looked to for early warning signs of trouble for the global economy. It measures dry freight costs for commodities such as coal, rice and wheat and, when it drops, economists start worrying about a slowdown in world trade and, by extension, in global economic activity. February was one such moment, when the index hit a record low of 290 points. It recovered as the year went on, with a spike in November after Trump’s victory but, at 961 points, it remains well below its peak of 11,793 points in May 2008.
The year began with fresh concerns about the extent of China’s economic slowdown, sending shockwaves through global markets. Economists expect GDP growth for the full year to come in at under 7% again and fall further next year, in a marked contrast to the expansion of 14% experienced a decade ago. The slowdown was widely expected as China’s economy matures but the nature of its growth has worried investors. As growth falters, Beijing has turned to debt-fuelled stimulus. That government spending drive combined with soaring property prices and record bank lending has prompted warnings about China’s debt mountain.
Mexico’s currency had the dubious honour of acting as a barometer for Donald Trump’s chance of victory in the US presidential race. After the Republican candidate threatened to build a wall between the US and Mexico and to scrap or rejig trade deals, the peso came under repeated pressure and slumped to an all-time low against the dollar after Trump’s win. More recently, the peso has steadied as Trump appears to rein in his campaign trail rhetoric but analysts warn the Mexican currency faces more volatility once the new president is inaugurated in January.
Low interest rates make it harder for banks to make a profit on the difference between the rates that are paid on savings and the rates that can be charged on loans. For evidence of what that means for banks’ share prices, look no further than Japan in 2016. Japanese banking stocks were already under pressure from years of electronic money printing by the central bank and tumbled further early in the year as the Bank of Japan imposed negative interest rates on them to encourage lending to businesses. But in September, the bank changed tack from its aggressive stimulus programme and shares across the sector staged a recovery on hopes the pressure on their profitability will now ease.
The European Central Bank has taken unprecendented measures to bolster anaemic growth in the currency bloc and to push up stubbornly low inflation. Despite ultra-low interest rates and a vast programme of electronic money printing, inflation remains well off the ECB goal of “below, but close to, 2%”. Economists also point to core inflation, which excludes volatile items such as energy, and has stuck around just 0.8% since the summer, suggesting there is little underlying upward pressure on prices. The ECB recently announced it was curbing the amount of stimulus it provides but its president, Mario Draghi, insisted the central bank remained ready to beef up its support if inflation fails to pick up.
The crushing defeat for the Italian prime minister Matteo Renzi in a referendum on constitutional reform in December came amid stagnating living standards and one of the highest unemployment rates in the eurozone (pdf), at 11.6%. The situation among under-25s is worse still, with youth unemployment at more than 36%, compared with 29% five years ago. France has also experienced a rise in youth unemployment in recent years – the latest figures put it above 25% – a trend expected to influence voting patterns in the 2017 presidential election.