2014 has seen bullish investors gain 13.69% on the S&P500 whilst leaving the contrarians out of pocket and embarrassed at their poor attempts to call a top. Investor sentiment has been high, stock markets have outperformed ‘safe haven‘ commodities such as gold and the US dollar is at its strongest since pre-crisis levels, ending the year trading at 90.27 (DXY). 3 key indicators to watch in 2015 include Janet Yellen, Abenomics and Oil.
A Less Dovish Yellen
Yellen has been gradually becoming less dovish throughout 2014. With US economic growth being revised upward to 5.0%, it could be the end of low interest rates. However, Deutsch Bank’s Chief US Economist predicts the FOMC will remain dovish throughout 2015. It is also important to note that the strong dollar reflects investor expectations for a rate rise in 2015.
What to watch: It is certain that the FOMC will be keeping a close eye on wage and price pressures throughout 2015. So long as the US economy can maintain solid growth, the FOMC could be raising interest rates around mid-year, in order to curb inflation. This bull market has predominantly been driven by share buybacks, which has been feasible due to the extremely low interest rates. A rate rise could see the number of share buybacks drop, resulting in less growth for the S&P 500.
After the Japanese sales tax increase in April, the economy dove into recession, due to a fall in consumer spending. Prime Minister Shinzo Abe’s strategy of aggressive bond buying, fiscal and monetary policy (known as Abenomics) are in full swing into 2015. Japan will start the year with a recently approved $29bn stimulus package approved in December.
What to watch: Prime Minister Abe has made it extremely clear Japan will hit 2% inflation targets, regardless of the policies that will be required to achieve this. Further stimulus could lead to an even weaker JPY, thus currency traders will be watching Abe and USD/JPY closely.
The Oil Crisis
Each week the price of Oil has been tumbling lower, since the highs of mid 2014 where crude oil stood at over $100 per barrel. Crude oil finished 2014 closing at almost 50% of that level at $53.64. But why has the price dropped? Some speculators believe that the US government is fixing oil prices in order to harm countries that rely heavily on oil exports. Coincidentally, Russia is one of them. But another simpler and more rational reason is excess supply caused by the US production boom.
What to watch: Saudi Arabia has been criticized by Iran for failing to intervene in the oil market. Whilst it is not purely Saudi Arabia‘s responsibility, it seems that no country wants to decrease its oil production as they will lose out on its revenues. Furthermore, many Middle Eastern countries require a higher oil price level to break-even.
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