The Federal Reserve was always wary of raising its rates and it was after much contemplation that this step was taken in December 2015. The indecisive quarter on contemplation was justified and the hesitation well placed, which acted as a catalyst to wipe out $2.3tn of global stocks at the start of this year;  the worst possible start to 2016. The extreme volatility had investors selling their shares in panic triggered by steep declines in China where the markets had to shut down twice within a week due to misplaced circuit breakers, a market monitoring methodology. Very soon, this ‘tsunami’ had reached the shores of Japan, Europe and the United States where investors continued to withdraw from equities. When the dust settled on this free-fall the US-based S&P 500 had lost $864bn in market capitalisation.
Looking closely at the largest global economies and the largest regional economy, we are going to witness a perfect storm today; In the US, the Fed will be looking at economic indicators very closely and evaluating whether they made a mistake to increase rates prematurely. Chinese volatility coupled with low growth and anemic commodities prices will need a dynamic local currency strategy to kick-start China, while low oil prices will test the Middle East’s resolve to fix regional political tensions and manage the imminent liquidity crunch.

The American dream redefined
The labour market in America has transformed from a union-based private enterprise to an automated and
dynamic market place. The new worker is no longer a market maker but a market taker fearing his role to be automated or moved out of the country. The American dream has thus transformed from a house and two cars to surviving with a job. This change has resulted in a Middle Class meltdown that has seen one in five
Americans live under the poverty line. While the unemployment has been
managed from its peak in 2009, there has been no wage inflation that has come through in the economy in the last three recoveries due to the qualitative aspects of the American workforce.
The Fed took a decision to increase
interest rates owing to strong
employment data number, ignoring the qualitative aspect and in doing so, have created a strong US Dollar that has
weakened other currencies and put downward pressure on commodities thereby further curtailing inflation that is a counterintuitive outcome to the stated objective of this rate hike.  

The dragon out of fire
China had been working on mechanisms that would reform and ensure that there is greater flexibility in the renminbi. Over the months these arrangements have increasingly looked as if they were an opportunistic response to capital
outflow and to weaken the local currency.
The real issue China has been facing is the rate hike. After months of Chinese
attempt to manage renminbi, they have now suspended currency exchange
arrangements with key international banks to control an outflow of foreign
reserve that has already cost the
exchequer $108B. China has imposed a $50,000 limit on individuals per year post the 3%  divergence of market rates between mainland (onshore) and Hong Kong (Offshore) exchange rates. The clumsy circuit breakers and equity market crash is therefore an effect and not a cause of Chinese problems, which came around due to a number of technical factors and has little correlation with the Chinese economy as a whole. With time the
regulators in China will manage these matters better.
With a weakening currency and
commodity prices, the global fear for
China is that of deflation, a scenario that has been present in Japan for over a decade and half. China would not like to get into a situation where the population saves instead of spends and where
corporate ability to raise prices and improve profits is compromised.
Currently though, China’s yuan blues and its depleting demand for oil is
creating further glut in the oil market.

Riyadh, we have a problem
With oil breaching its 12-year lows, the entire Opec and Riyadh face a serious problem of oil recovery which is likely to take a while. Oil production has seen
correction mainly on account of non-Opec members reducing production, but the market still has an oversupply in excess of 3mn barrels a day. Opec, especially Saudi, have no signs of curtailing supply as Riyadh continue to pump 10mn barrels of oil a day in a strategy to preserve market share and put pressure on rival producers that have a higher cost of production.
With this steady stream of oil
production continuing, and Iran bringing their 400,000 barrels into the market, the world will soon see a shortage of storage space for oil in the next few months. With this oil prices will see further downward pressure.
With subsidies being lifted across GCC, they are headed in the right direction to manage this challenge. Riyadh placing Aramco on the anvil to partially float the largest global company shows that they are determined to manage this oil crisis at all costs. In addition to all structural challenges in the industry, the dollar strength which has come around due to the rate hike will see further downward pressure on oil. Riyadh is also evaluating raising debt, which, when it happens will sap away liquidity from the regional bank market.
The US, China and Saudi will be key and interdependent economies to watch this year and it will be critical that they work together as the global economies battles this latest crisis.
The US must review it’s rate hike given weak GDP, lack of wage inflation and
quality of non-farm payroll. This will
facilitate Chinese equity market & it’s currency so that it can start growing again to facilitate an oil recovery. Till than Saudi has to evaluate production cuts and rationalise spending. The dominoes are falling and the interdependent of these three economies will be critical this year.

Salman Gulzar is head of corporate banking at Mashreq Qatar and an expert in financial markets.