FXStreet (Delhi) – Research Team at Deutsche Bank, suggests that in the year ahead, we could also see signals that the monetary spigots in Europe will begin to close as well after the Fed raised rates. Key Quotes “In a world that has been awash with central bank liquidity for most of the past decade, the central question for the year ahead is how the global economy and financial markets will react as the tap on that liquidity begins to tighten.” “While the pivot away from this great monetary experiment is unprecedented and will not be without risks, we expect the world economy and financial markets to weather this turn in policy reasonably well. Supporting this adjustment is the expectation that major central banks -- and the Fed in particular -- will be moving far more cautiously than they have in the past as they withdraw accommodation.” “The economic backdrop should allow for this gradual pace of policy normalization, at least initially. Global growth is expected to rebound gradually from the weakest growth rate since the financial crisis in 2015. Growth in advanced economies is projected to hold steady just shy of 2% over the next three years, with growth in the US slowing to near 2%, Europe’s steady recovery continuing and Japan rebounding from disappointing growth this year.” “The coming year should see growth in emerging market economies rebound, as the severe contractions in Russia and Brazil moderate and recent declines in export growth are expected to reverse, albeit weakly. Nonetheless, 2016 will be challenging for the emerging markets as falling commodity prices and still-weak global trade growth extend the recent experience with budgetary and balance of payments pressures. China is expected to continue its gradual deceleration, offering little respite to commodity producers.” “Market interest rates should rise next year – we see the 10-year Treasury yield ending the year at 2.5% with risks skewed to the upside -- as the market prices a tightening Fed. US credit spreads are likely to widen further as defaults rise moderately, but we do not see Fed hikes proving problematic for credit next year. The US dollar upswing should continue, though at a more modest pace. And we see equities remaining resilient and presenting some upside, as long as the rise in rates is limited and orderly.” “The risks around our baseline view seem more numerous than in the past due to the unprecedented shift in monetary policy. The main downside is that the market adjustment to a tightening Fed is more adverse than we anticipate. A spike in yields could set off a significant re-pricing of global risk assets. This reaction would intensify if the Fed finds itself behind the curve as inflation rises from a tight labor market. Beyond the Fed, a sharper-than-expected slowdown in China next year would have obvious knock-on effects on commodities, global trade and emerging markets. Meanwhile, intensified European political risk is also possible if differences of opinion between countries on divisive themes like the refugee crisis spill over into other policy areas.” “On the positive side, a surprising recovery in productivity growth in advanced economies, especially the US, would allow normalization to proceed very slowly and support a stronger recovery on the demand side of the economy. Risks are also skewed to the upside of our US economic outlook. The rebound in business fixed investment from a low base could be stronger than expected, especially with the peak impact from the drop in oil likely behind us, and the drag from a stronger dollar should begin to wane after mid-year.” For more information, read our latest forex news.