2016 started off on a down note, with the oil crisis and fears of a slowdown in China rattling markets. By the 18th of January, U.S. equity markets had shed more than 10 percent on the year; the S&P 500 fell to 1812 from 2038, and the Dow Jones Industrial Average fell 2000 in what looked to be a torrid year for investors. 

What a difference eleven and a half months make. As 2016 comes to a close, it has been a year of record high prices in both equities and bonds, further unconventional central bank policy and periods of unprecedented volatility in commodity markets. 

Record equity prices

2016 began with the acceleration of the commodity crisis that sent oil prices to multi-year lows. WTI Crude fell below $27 a barrel, crippling Middle Eastern economies and dragging equity prices with them. All major indices fell by more than 10 percent to begin the year. 

After stabilizing in February, U.S. equities began an unprecedented turn north, dodging periods of volatility on their way to all-time highs. In August the three major U.S. indices (S&P 500, Dow Jones and Nasdaq) reached all-time highs, and on November 21, these three indices, plus the Russell 2000 made new all-time highs on the same day. (Further reading: Party Like It's 1999: 4 Stock Indices Hit Simultaneous Highs)

But the record run in equity markets faced some stern tests in 2016, most notably on the political front. In June, the U.K. voted to leave the European Union (Brexit), which sent global equities into free fall. In the 48-hours following the result, $3 trillion was wiped off global markets as investors feared the populist movement in Europe would leave to growing protectionism and trade wars that would dampen growth. However, the falling British pound stabilized European equities as they made it cheaper for foreign investment and markets continued to climb. On October 4 the FTSE 100 rose above 7000 for the first time. 

It was a similar scenario in the U.S. after Donald Trump defeated Hillary Clinton in the 2016 Presidential election. Shortly after Clinton conceded, Dow Jones Industrial Average futures fell by more than 600 points as fears of anti-trade and protectionism had investors hitting the flight to quality button. However, once investors assessed Trump's fiscal policy, equity prices, interest rates and the U.S. dollar all turned sharply higher as inflation expectations grew. Less than two weeks after the results the Dow went through 19,000 and the S&P 500 through 2200. 

The S&P 500 finished higher 6 of the eleven months ending November and is on track to add December to that list. The best performing month was March where it gained 6.3 percent and the worst performing month for the S&P was January where it finished down 4.8 percent, despite being down 10.5 percent in mid-January. 

Unconventional monetary policy hits currencies

As interest rates in the U.S. began to normalize, the next two biggest central banks, Japan's and the ECB, continued to tinker with monetary policy as growth and inflation remained benign throughout the year. In March, the ECB cut the deposit rate to minus 0.4 percent and in September, the Bank of Japan announced it would shift its focus to the yield curve. 

After moving the deposit rate further into negative territory in March, the ECB said it is unlikely to reach its 2 percent target rate, and it reduced the 2016 growth forecast from 1.7 percent to 1.4 percent. In its policy statement, ECB President Mario Draghi said that "survey data point to weaker than expected growth momentum at the beginning of this year." Additionally, the ECB increased its monthly bond buying program from €60 billion to €80 billion. In December, the ECB announced it would reduce the amount back to €60 billion a month, but extended it through to the end of 2017. On the back of the news, the EUR fell towards the key 1.05 level against the U.S. dollar as investors eyed parity. (See also: The European Banking Crisis Explained)

In Japan, the central bank continued to battle in a deflationary environment, and in September the Bank of Japan announced it was to shift its focus to long-term rates in an attempt to manipulate the yield curve. By steepening the yield curve, the BOJ hopes to increase banks profitability by keeping long-term rates above short-term rates. While the bank did say it was not pegging the 10-year yield, most saw the policy as a form of yield pegging. In its policy statement the BOJ said, "the current target level of 10-year JGB yields, which is around 0 percent, is set as an operating target for market operations for the intermeeting period. The Bank does not intend to peg 10-year JGB yields at this level for long in the future. It will examine an appropriate shape of the yield curve at every MPM." 

Oil price volatility 

Oil prices swayed markets early in 2016 when prices hit multi-year lows. At the beginning of February, crude traded below $30 a barrel for the first time in 12 years as reluctance to cut production flooded the market. The price decline crippled many energy stocks and rig counts in the U.S. plunged to record lows. 

The middle part of the year saw oil climb off its lows, trading in a $40 to $50 a barrel range as fears of a fully-fledged crisis were averted, but an end of the supply stand-off remained. Then, in November, the Organization for Petroleum Exporting Countries (OPEC) agreed to cut supply by 1.2 million barrels a day, sending oil through $50 for the first time since mid-2015, and two weeks later non-OPEC nations agreed to a further production cut, which led to more gains in oil prices. By mid December oil prices had doubled of February's lows. (See also: Crude Oil Soars After OPEC and Non-OPEC Countries Agree to Production Cuts)

The bottom line

2016 was a year defined by a changing political landscape. With the Brexit vote and Donald Trump's Presidential victory, it solidified the growing populism movement. Despite these fears, financial markets shrugged them off, and equities in the U.S. rallied to all-time highs as post-election optimism grew. 

However, both Europe and Asia grappled with slowing growth and benign inflation, resulting in continued accommodative monetary policy. 

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