US Indices Close 2016 Riding High

Daily Analysis - 02/01/2017

Major US Equity Benchmarks Close 2016 on a Positive Note

After a tumultuous year, all three major benchmarks for US equities ended 2016 higher. Despite displaying some weakness during 2016’s last session, the Dow Jones Industrial Average, the Nasdaq Composite, and the S&P 500 ended the year showing positive returns. After significant volatility and uncertainty throughout the year that weighed on sentiment, indices managed to book significant gains.

US Benchmarks Remain Elevated Despite Risks

With its strongest showing in three years, the Dow Jones Industrial Average finished 2016 with double digit percentage returns. The feat has only happened four times in the past decade, adding to positive sentiment amongst traders even after weak year-end trading volumes. Although the Dow Jones was on pace earlier in December to reach the 20,000 threshold, the index pulled back after highs on December 20^th, when it closed at 19,932.

After a 9.40% climb during 2016, the S&P 500 was just slightly shy of double-digit growth, ending what would have been the sixth such gain in the past 10 years. Upon closer examination of the S&P 500, energy was the leading sector as far as returns, with a significant 23.40% gain, while financials and telecommunications services improved by 19.10% and 17.10%, respectively.

Oil Remains Resilient

The agreement struck by OPEC and non-OPEC nations regarding oil output caps is set to go into effect even as the US Energy Information Administration reports rising stockpiles. EIA data from last week showed an additional crude oil stockpile gain of 614,000 barrels. Crude oil managed to record the best winning streak since 2009 as OPEC and non-OPEC nations work to reduce what has become a chronic glut. Oil futures rose by 52.00% in the London market this year after prices remained relatively unchanged on Friday.

The EIA’s report continues to show surprising growth for US stockpiles for the second week in a row. Additionally, the US’ drill rig count grew for the ninth consecutive week to 525. Since September 2016, US producers have added 100 active drill rigs, marking the largest 3-month expansion in two years. Despite substantial headwinds, oil prices managed a significant rebound during the second half of 2016.

EURUSD Ends 2016 on a Positive Note

In spite of an illiquid market environment due to the holidays, EURUSD soared during Thursday’s trading, sending shockwaves throughout currency markets. Friday’s session displayed a surprising rise in activity for currencies as EURUSD, the interbank markets’ most liquid currency pair, climbed between the US and Tokyo sessions.

The pair surged by 1.20% in the minute before midnight. All Euro pairs reacted similarly, with the Pound and Dollar crosses seeing the most action. Regardless, the major movement was not so surprising given usual start-of-year conditions. Euro Futures saw 20,000 contracts turn over during the hour, the heaviest trading volume since two weeks earlier.

Chinese Manufacturing Grows for 5^th Straight Month

China’s economy ended 2016 with positive momentum despite periodic weakness throughout the year. Even with slow factory growth in December, economic activity remained elevated as China’s manufacturing PMI posted its fifth consecutive month of growth. The expansion is a further sign of stabilization after a whirlwind 2016.

The official Manufacturing Purchasing Managers’ Index was close to one-year highs, with a 51.4 print for the month of December. The Index’s highest peak was reached in November, when the PMI reached 51.7. December’s data was well ahead of the same period last year, when the PMI showed shrinking activity at 49.7. While China’s economy has slowly cooled amid an attempted pivot towards consumption, officials have renewed their stimulus efforts. Aside from stimulus measures aimed at bolstering growth, the government has also pledged to expand spending on infrastructure.