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Tuesday, January 3, 2017

December 2016 - Monthly Market Commentary

December was another mixed month for global risk assets.  Developed market equities were mostly higher, emerging market equities were mixed, the USD strengthened, US interest rates rose, commodities were mixed, and corporate credit spreads tightened.  As markets in December continued to digest the Trump victory and his cabinet appointments, US equity markets again made several new all-time highs during the month.  The Federal Reserve increased interest rates for the second time in the past decade, and indicated that three rate hikes were likely in 2017 as they pointed to a strengthening labor market and a pickup in inflation.  The ECB, on the other hand, held rates steady and extended its quantitative easing program to the end of 2017.  In Japan, the BOJ also held rates steady and offered a more optimistic assessment of the economy.  The US job report showed that 178,000 jobs were added in November, the unemployment rate fell to 4.6% (the lowest since August 2007), and the labor force participation rate ticked down to 62.7%. 
Notable corporate transactions announced in December included the $7.8 billion purchase of Eastern European brewing assets by Asahi Group Holdings from AB InBev, Amundi’s $3.8 billion acquisition of Pioneer Investments from Unicredit, Fairfax’s $4.9 billion purchase of Allied World, the $2.4 billion acquisition of Bank of America’s UK credit card business by Lloyds Banking Group, the $67 billion merger of Praxair and Linde, Coca-Cola’s $3.2 billion purchase of a 54.5% stake in Coca-Cola Beverages Africa from AB Inbev, the $950 million acquisition of 865 drug stores by Fred’s from Walgreens Boots Alliance, Megafon’s $740 million purchase of a majority stake in, the $3 billion acquisition of Chevron’s geothermal assets in Indonesia and the Philippines by units of Ayala Corp., and BP’s $1.3 billion purchase of Woolworths’ Australian fuels business.
Developed market equity markets were mostly higher in December (see page 8), with the largest gains in Italy (+13%), Spain (+8.2%), and Germany (+7%); the worst performing were Hong Kong (-6.4%), Japan (+1%), and Canada (+1.8%).  US small caps outperformed large caps, with the Russell 2000 up 2.8% and the Russell 1000 up 1.9% (see page 3).  Telecom (+8.1%), Utilities (+4.9%), and Real Estate (+4.4%) were the best performing sectors in December, while Consumer Discretionary (+0.1%), Materials (+0.1%), and Industrials (+0.5%) were the worst performing (see page 2).  Large cap growth (+1.2%) underperformed large cap value (+2.5%) in December (see page 3).  Emerging Market equities were mostly higher in December (see page 9), with the biggest gains in Russia (+12.5%), Indonesia (+5.4%), and Thailand (+2.1%); China (-4.1%), Argentina (-2.7%), and Taiwan (-1.3%) were the worst performing. 
In currencies, the USD Index was up 0.7% in December (see page 10).  The weakest developed market currencies against the USD were the Australian Dollar (-2.4%), Japanese Yen (-2.2%), and the New Zealand Dollar (-2.1%), while gains were seen in the Swedish Krona (+1.4%).  Emerging market currencies were mixed against the USD, with gains in the Russian Ruble (+4.2%), Brazilian Real (+4%), and South African Rand (+2.6%) and losses in the Korean Won (-2.5%), Turkish Lira (-2.5%), and Taiwan Dollar (-1.4%).
The US Treasury yield curve shifted higher as rates rose across the curve in December (see page 12).  10 year rates closed the month at 2.45%, up from 2.38% at November month end.  Investment grade and high yield credit spreads tightened in December (see page 13).
In commodities, the GSCI index was up 4.7% in December (see page 11), with gains in Energy (+8.4%) and Livestock (+7.5%) and losses in Industrial Metals (-5.4%), Precious Metals (-2%) and Agriculture (-1.3%).  Within individual commodities, Lean Hogs (+19.8%), Gasoline (+11.6%), and Natural Gas (+11.4%) saw the biggest gains, while Palladium (-11.5%), Cocoa (-11%), and Coffee (-9%) saw the biggest losses.  Gold was down 1.8% in December.

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