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December saw markets limp to the finish line to close out a relatively challenging year for investors as concerns surrounding monetary policy, Chinese fundamentals, and commodity/currency volatility dominated the conversation. As has been the case for several years, central bank policy maneuvers grabbed headlines and drove markets.

Overall, U.S. equities fell 1.5%-5.05% with smaller stocks underperforming larger blue chip cap names. Non-U.S. markets fell in a similar fashion but were penalized more for currency depreciation than equity market moves. Bond yields increased with the mid-month Fed rate hike acting as the primary catalyst while spread widening contributed to further losses across corporate investment grade and high yield credits. The commodity complex continued its descent with crude oil plummeting 16% while grains fell 2.6%. The dollar stabilized somewhat in December as did industrial metals such as copper, aluminum, and zinc.

Mario Draghi underwhelmed markets after weeks of rhetoric by opting not to increase the amount of QE but rather extending the duration (through 3/2017) of the program and initiating additional rate cuts. The Fed embarked on its first rate hike campaign since 2006, ending seven years of ZIRP (Zero Interest Rate Policy), by guiding the Fed Funds rate higher by 0.25%. The U.S. Congress passed a growth friendly spending bill which opted to end the ban on oil exports, provided tax cuts estimated at $50b, and authorized a substantial fiscal spend on infrastructure related initiatives.

The inter-relationship of deteriorating Chinese fundamentals and currency market volatility seems now to have moved to the front seat of market dialogs as China’s policy makers struggle to manage capital flight, estimated over $900b between Q214 and Q315, and yuan volatility. China has been forced to intervene in FX markets to defend (support) the yuan’s valuation as evidenced by a record foreign exchange reserves December drawdown of over $100b. Also prevalent in December’s backdrop were the benefits (cost savings) and consequences (industry stress) of the oil price decline and the ensuing impact on market psyche. While a substantial uptick in oil industry defaults seems inevitable, the precise spillover effects will most certainly be rather difficult to forecast.