2017 Financial Market Outlook

Britain’s shocking vote to leave the European Union and the election of Donald Trump to US president had far-reaching consequences on the global financial markets. Those consequences are expected to be played out further in 2017. Against this backdrop, below are five trends that could emerge in 2017.

1. The Rise of populism

Brexit and Donald Trump have one thing in common: they were the outcome of populism, or the belief in the power of the regular people. Populism is expected to be the wave of the future, as voters look to replace establishment politics with something more authentic. Germany and France both head to the polls in 2017. Right-wing populist forces are alive and well in both countries, and might make for volatile election periods.

Naturally, the global financial markets are strongly impacted by geopolitics. Therefore, investors may expect several bouts of volatility leading up to French and German elections, which will be held in April and October, respectively. As the polls tighten, investors may brace for risk-off sentiment to prevail, as markets hedge against an increasingly divided Europe.

2. US pro-growth agenda

The election of Donald Trump was a vote for lower taxes, deregulation and massive fiscal spending. These forces could create a short-term spike in US economic growth. These policies may also lead to faster inflation, forcing the Federal Reserve to adopt a possibly more aggressive approach which may lead to raising of interest rates. This pro-growth agenda may lead to the acceleration of the US dollar and might make US equities a more attractive place to invest – again, over the short term. The long-term consequences of such policies are subject to great debate.

3. Oil prices to remain lower for longer

Crude oil showed signs of recovery in 2016, but ultimately fell well below initial valuations, as producers failed to drain the market of excess supply. Now, analysts are expecting oil prices to remain lower for longer. While the Organization of the Petroleum Exporting Countries (OPEC) has taken modest steps to rebalance the market, its members continue to prioritize maintaining market share. Although a global pact to freeze output may boost oil prices short-term, it may also encourage US shale producers to re-enter the market.

Meanwhile, president-elect Donald Trump has vowed to make the United States energy independent.[1] On the campaign trail, this included blocking oil imports from the Middle East. A booming US shale industry may create more bearish conditions for oil prices, ensuring that prices remain lower.

4. Divergent monetary policies set to continue

The global outlook on monetary policy remains largely what is was a year ago. Namely, the United States will continue to diverge from the rest of the pack. In fact, Trump’s pro-growth agenda  may trigger faster inflation, increasing the possibility that the Federal Reserve may raise interest rates faster than previously expected. Fed Chair Janet Yellen recently told Congress that the president-elect’s platform  may trigger faster inflation and swell the national debt.

“The economy is operating relatively close to full employment at this point,” Yellen told the Joint Economic Committee. As a result, massive government outlays would drive up inflation as employers bid up wages to attract a limited pool of workers,” Yellen said.[2]

In contrast, the Bank of Japan (BOJ) has embarked on a new stimulus campaign focused on yield-curve targeting as opposed to quantitative easing. The outlook on the European Central Bank (ECB) is less certain, given that its asset purchase program is set to expire in the Spring. However, the ECB has vowed to keep monetary policy accommodative for as long as needed.[3] Given the region’s anemic growth, rates might be expected to stay lower for longer.

Meanwhile, the Bank of England (BOE) will continue to hedge against Brexit-induced risks. This may entail a new round of easing, depending on the performance of the British economy.

5. Safe havens to remain in demand

Precious metals have had a rough couple of months, but their outlook remains favourable amid geopolitical tensions, volatile financial markets and meager economic growth throughout the world. Other safe havens that will get plenty of attention from traders are the US dollar and even Bitcoin, the digital currency that is being increasingly viewed as a risk-off asset.

A robust US dollar may act as a disincentive for gold and silver, but raging geopolitical risks and the rise of populist leaders across Europe will keep the market active for the foreseeable future. Additionally, elevated systemic risks in an increasingly negative yield environment for government bonds could see precious metals rising.[4]

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[1] Matthew J. Belvedere (October 21, 2016). “Trump would get US to energy independence in about 6 years: Advisor Harold Hamm.” CNBC.

[2] Paul Davidson (November 17, 2016). “Yellen: Trump plan may stoke inflation, debt.” USA Today.

[3] Jana Randow (October 6, 2016). “ECB Commits to Lift Inflation With Forecast Built on Market View.” Bloomberg.

[4] Frik Els (August 14, 2016). “RBC adds $200 to its gold price forecast.” Mining.com.