Dec. 28, 2016 (Amplify Trading) – Amplify’s Head of Trading, Piers Curran, provides his 2017 insights. Below is a summary of what Piers thinks for some of the biggest issues facing the global financial markets in 2017.
We close out a extraordinary year for global markets. Several of the key economic risks materialised with the UK’s Brexit vote, Trump’s stunning election win, Renzi’s lost referendum and the Fed hike to cap it all off. Who would have dared predict that given these outcomes US equities would be surging to new all time highs as we march into Christmas. The notable takeaways from 2016 are Sterling weakness, markets pricing in Trump’s stimulus package with a steeper Fed rate hiking trajectory resulting in a sharp spike in bond yields, a surging US Dollar and rampant equity markets. One can’t help think of one word: complacency.
Unfortunately, the probability of further terrorism in Western Europe is rising, which will impact Angela Merkel’s ability to win a record fourth term in the German election in H2 2017. I believe that, outside of Brexit, this now becomes the biggest European political risk. Italy: After their referendum it will likely be an unchanged scenario, no reform and no growth. France: Presidential elections in April/May 2017 will be a temporary distraction, ultimately I don’t think Le Pen can win as France has a two stage election process which makes it much more unlikely for a shock result to occur a la Brexit and Trump. But for sure European politics stays at the top of the global risks list for 2017.
Sorry to be bah humbug but I expect the first half of 2017 to show a notable change for the worse in market sentiment on this issue! As we approach the trigger date for article 50, I expect politicians on both sides of the Channel to posture for the forthcoming battle. This should trigger the next leg lower for Sterling (GBPUSD to sustain a break below 1.20 and head towards 1.10), which in turn will exacerbate a growing unease over rising inflation and, although FTSE100 stocks may stay supported due further currency weakness, I see the economic risks outweighing the cheap currency benefits to weigh on global equities.
I believe the most significant factor is that Saudi Arabia’s strategy has now reversed for the first time in two years, whereby they are actively supportive of sustaining a move above $50 per barrel. This is tied into both their desire to diversify their economy, which involves a Saudi Aramco IPO in early 2018, and the fact that the market share they lost to US Shale producers has been returned to them via increased Asian demand. However, history tells us that OPEC implementation risk should never be ignored so whilst there is likely to be volatility in Q1, I believe the price of oil will spend most of 2017 between $50 and $60 per barrel.
TRUMP AND THE FED
US equities are finishing 2016 on all-time highs. Whilst I think that this can continue in the first few weeks of 2017, I believe that the 2017 high for the year will be printed in the first month of the year. Markets are irrationally pricing in a full and quick Trump fiscal stimulus package, and I expect the reality to be much more disappointing. Whilst Congress is Republican, they will want to remind Trump he doesn’t have free reign by stalling and trimming his fiscal package. As a result, I expect to see equities give back some H2 2016 gains, the US dollar to do the same and for the Fed as a result to be more dovish than the three 2017 hikes projected.
Italian Banks need at least €52 billion to clean up their balance sheet which is a much larger amount than the Italian Government’s proposed €20 billion rescue package outlined on the 19th December. I think it is inevitable that Banca Monte dei Paschi di Sienna gets fully bailed out and becomes stated owned in 2017. However, even though in the long run this continues the slow motion demise of the Eurozone’s third largest economy, in 2017 the ECB should have enough ammunition to delay the eruption of this longer term ticking time bomb. In the meantime the Italian economy continues to flatline with an on-going inability drive through any much needed reform.