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What next for markets after a stormy quarter?

As we approach the end of the first quarter of 2016 we can reflect on a turbulent past few months that tells us little about the overall direction of asset prices over the course of the next few months.

We do appear to have found a short term base in oil and broader commodity prices while fears about a sharp devaluation of the Chinese yuan appear to have subsided for now.

There is also the prospect, given the recent surprisingly downbeat assessment from the US Federal Reserve about the international outlook, and its assessment about future rate rises, that the rise in the value of the US dollar over the past two years may well have come to an end.

A combination of all these three different factors appears to have also put a little bit of a floor under broader equity markets, though European stocks still have some way to go before reversing their Q1 losses, due to what appears to be a potential stabilisation and recovery in the value of the euro.

The FTSE100 initially looked as if it might manage to recover back close to the levels that we saw at the end of last year, helped by a weaker pound and a stabilisation in commodity prices, which when you consider where we were in mid-February is a remarkable turn of events.

The same can also be said for broader equity markets in general though European markets have underperformed simply because the value of the euro has risen relative to its peers, making European assets less attractive relative to US and UK equities, while the FTSE250 has also underperformed due to its more domestic focus set against a slightly more uncertain UK domestic outlook.

Looking ahead to Q2 it seems unlikely that the volatility we've seen this quarter will subside to any degree, given that the concerns markets were obsessing about in the last two quarters haven't gone away.

When you take all that into consideration it makes it all the more bizarre that the US Federal Reserve, having calmed expectations of a rapid cycle of potential rate rises at its meeting last week, see all that good work undone by some bizarre interventions by policymakers making the case for a rate rise in April. What is all the more puzzling is that there was so little sign of this dissent in the dot plots or the voting patterns.

Central banks should be arbiters of price stability, not price volatility, yet hear we have a Fed giving conflicting signals around guidance and in the process acting as a destabilising force in financial markets.

This suggests that significant gains over the next three months could well be hard won, and potentially vulnerable, particularly given that one of the key factors helping drive the stabilisation in global markets has been the recent strengthening of the Yuan against the US dollar to its best levels this quarter.

The Chinese currency and its economy will continue to act as a stress point for global markets in Q2, but the fact that Chinese authorities appear to have adapted their currency depreciation policy in the face of market turmoil, does suggest that global central bank policy has become a little more coordinated in the past few weeks.

Other stress points for Q2 are likely to be downside risks to economic activity caused by the recent Brussels terrorist attacks, as governments respond to an increasing terrorist threat, while the upcoming referendum on UK membership of the EU adds another dimension to an increasingly fragmented political landscape across Europe.

This political fragmentation could also act as a drag on the US economy as the election campaign there heats up between Presidential hopefuls Donald Trump and Hillary Clinton.

All in all Q2 promises to be as equally volatile as Q1, great news if you’re a trader, not so much if you’re an investor.

The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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