Global capital markets were generally positive in the fourth quarter as most major developed economies continued to strengthen on supportive central bank policies and lower fuel prices that boosted consumer spending. Canada was a notable exception, as the stock market and the dollar were badly battered by the ongoing drop in crude oil prices.

Canada was also a laggard for the year as a whole as oil prices sank by about 30%, dragging the energy-heavy S&P/TSX Composite Index lower and the currency to its lowest level in seven years against the U.S. dollar. The Organization of Petroleum Exporting Countries (OPEC) kept its production high as it battles to maintain market share, despite sagging demand from China and growing stockpiles. However, major financial indices were generally flat to higher on the year.

Uncertainty about whether the U.S. Federal Reserve would raise rates in December, contributed to global market volatility in the fourth quarter. The December 17 announcement that the key Fed funds rate would go up by 25 basis points to 50 basis points – in line with most forecasts – provided clarity and set the stage for future increases in 2016. While the move did have some impact on equity markets, it also confirmed the U.S. economy is now on firmer footing.

In Canadian dollar terms, the Russell 1000® Index ended the quarter 10.3% higher, and the year 21% higher. However, stripping out the strength of the U.S. dollar, in local currency terms, it ended the quarter up 6.5% and the year a modest 0.9%. Europe, Japan and other developed markets also marched higher: the Russell Developed non-North America Large Cap Index rose 8.5% in the fourth quarter and 19.6% in the year in Canadian dollar terms. Emerging Markets were held back in part by lower commodity prices, with the Russell Emerging Markets Index gaining 6.3% in the quarter and 4.6% in the year.

Central banks key players

Central banks were key players during the fourth quarter. While all eyes were on the Fed, the European Central Bank (ECB) continued to aggressively support the region’s economy, cutting interest rates deep into negative territory and extending its bond-buying program in a bid to stoke inflation. These moves have helped underpin the financial markets and confidence towards the Eurozone – critical for the region to keep recessionary tendencies in check.

Similar to the ECB, the Bank of Japan continues on the easing path; however recent economic data has been mixed and market participants have started to price in further expansion of their quantitative easing.

And the Bank of Canada (BoC), after two interest rate cuts over the first half of 2015, appears inclined to await additional data before making a decision on further accommodation. Indeed the BoC’s job is being complicated by elevated household finances.

Canada outlook
 
The S&P/TSX Composite Index lost 1.4% in the quarter and 8.3% in the year as the slump in commodity prices reverberated through the economy, knocking the loonie to its lowest point in seven years. Russell Investments // Russell Market Commentary

Russell Investments’ outlook for Canada’s economy in 2016 reflects these headwinds. It sees Gross Domestic Product growing in a range of 1.2% to 1.6% and the Canadian dollar trading in a range of 0.70-0.77 against the U.S. dollar.

Bond markets, as represented by the FTSE TMX Canada Universe Bond Index, rose 1.0% in the fourth quarter and 3.5% in the year. The 10-year Government of Canada bond yield ended 2015 at 1.39%. Russell Investments forecasts it will grind slightly higher in 2016, within a range of 1.9% to 2.3%.

The fourth quarter also had some worrisome corporate developments. Valeant Pharmaceutical, which had become one of the most influential names in the S&P/TSX Composite Index, continued to tumble on governance concerns. Transportation giant Bombardier was beset by delays to its new C-Series aircraft and ended the year with a management shuffle and is in discussions with the federal government about a potential taxpayer-funded bailout.

Russell Investments’ outlook for Canada’s economy in 2016 reflects these headwinds. It sees Gross Domestic Product growing in a range of 1.2% to 1.6% and the Canadian dollar trading in a range of 0.70-0.77 against the U.S. dollar.

Bond markets, as represented by the FTSE TMX Canada Universe Bond Index, rose 1.0% in the fourth quarter and 3.5% in the year. The 10-year Government of Canada bond yield ended 2015 at 1.39%. Russell Investments forecasts it will grind slightly higher in 2016, within a range of 1.9% to 2.3%.

The fourth quarter also had some worrisome corporate developments. Valeant Pharmaceutical, which had become one of the most influential names in the S&P/TSX Composite Index, continued to tumble on governance concerns. Transportation giant Bombardier was beset by delays to its new C-Series aircraft and ended the year with a management shuffle and is in discussions with the federal government about a potential taxpayer-funded bailout.