Coming off of its biggest annual gain since 2009, crude oil will be
one market to watch in 2017. After breaking sharply at the start of 2016
then treading water for most of the year, crude oil prices surged from
mid-November to the end of the year into prices not seen since mid-2015.
In late November, OPEC and non-OPEC countries reached a deal to cut
output by 1.8 million barrels a day in 2017 beginning on January 1. The
plan is designed to reduce the global supply glut and stabilize prices.
Since this is considered a landmark deal and it begins on January 1, we’re going to make this event number 1.
The second event to watch in 2017 is the inauguration of Donald Trump
as President of the United States on January 20. Trump inauguration
speech could move the stock market in a major way if he sticks with the
campaign slogan that helped get him elected, “Make America Great Again”.
OPEC will be back in focus again in January for event number 3. On
January 21-22, the first meeting of a committee of OPEC and non-OPEC
nations responsible for monitoring compliance with a global agreement to
reduce oil output will be held in Vienna.
Since the deal relies on 100% compliance by the nations involved,
this committee was set-up to catch any cheaters and to fix problems that
may arise quickly. Given OPEC member history of non-compliance with
agreements in the past, this meeting will be important because the deal
may need to be reinforced early to set the right tone for the rest of
The first U.S. Federal Reserve Bank monetary policy meeting for the
year will be held in January. At this meeting, the central bank will
have the opportunity to raise its benchmark interest rate a little more
than a month after its last rate hike. Since it projected as many as
three rate hikes in 2017, every meeting will be important because of the
possibility of a rate hike.
There is no doubt that investors remember last year at this time when
the Fed was promising four rate hikes in 2016 and delivered only one in
December. This being said, investors will be paying close attention to
the Fed at each meeting and especially at the quarterly meetings in
March, June, September and December because the Fed is expected to make
is projections at these meetings.
Any reduction or increase in the frequency of rate hikes could cause volatility spikes in the markets.
In June 2016, the U.K. voted to leave the European Union and this
triggered a volatile response in the markets while driving the British
Pound sharply lower. In October 2016, the British Pound dropped sharply
again after U.K. Prime Minister Theresa May said she would file Article
50 no later than the end of March 2017.
The negotiations needed for Britain to leave the EU can only begin
with the formal filing of Article 50. The complicated negotiations are
expected to take two years to complete. This is a long time for
investors to remain patient so I expect renewed volatility and a further
decline in the British Pound in reaction to this event.
In keeping with the political theme generated by Brexit and
subsequent events, several key elections in Europe could stress the
European Union and the Euro Zone economy. Last year, we had the Brexit
vote, a referendum in Italy and a run-off presidential vote in Austria.
This year, France will elect a new president on April 23.
The low approval rating of current President Francois Hollande gives
far-right National Front leader Marine Le Pen a chance to win the
election. She has said that if she wins, she would hold a referendum to
leave the EU and the Euro currency.
On March 15, Holland will hold a general election that could alter
the outlook for the European economy. And Germany must hold a federal
election before October 22. Current Chancellor Angela Merkel will be
going toe-to-toe with the nationalist Alternative fur Deutschland party.
The key issues surrounding the election are Germany’s EU membership and
the “open door” immigration policy.
Currently, the front-runner in the election is President Hassan
Rouhani. After negotiating the 2015 nuclear deal with several Western
nations and getting the economic sanctions lifted, he is likely to bump
heads with U.S. President Donald Trump, if he decides to scrap the
current nuclear agreement. Rising tensions could disrupt the crude oil
China’s economy in 2016 stabilized and deflation pressures eased. The
People’s Bank of China may even lower interest rates further while
attempting to ease the pressure from high debt levels. However, all of
this could come to a screeching halt if Trump gets into a major trade
riff with China.
Donald Trump candidate called China a currency manipulator and
promised to add a huge tariff to all Chinese imports. He also talked
about ending, what he considers to be unfavorable trade agreements.
Trump could create a major anti-trade situation with China that could
spread to other emerging markets.
Will 2017 see the end of rate cuts and quantitative easing? 2016
ended with the global economy showing signs of an upturn. However, the
U.S. was the only country that raised its benchmark interest rate.
Questions remain about the other major central banks. Will the Bank of
England be forced to take action to prop up the U.K. economy or the
British Pound? Will the European Central Bank begin to taper or set an
end date for its quantitative easing program? Will the ECB and the Bank
of Japan be forced by rising interest rates to abandon its negative
interest rate policy? Are the Australian and New Zealand economies ready
for a rate hike?
Trump went head to head with Fed Chair Janet Yellen during the
presidential campaign, but both seem to have made nice since Trump won
the election. Although the Fed has said there is nothing wrong with
stimulating the economy through fiscal spending like Trump plans to do,
they have said that the spending carries a lot of responsibility.
Trump’s policies are expected to be inflationary. The Fed has some
leeway there since consumer inflation is currently below their 2.0%
target, but how high will the central bank allow inflation to rise above
this level before it takes action to drive inflation back down?
Trump has also promised jobs, but Yellen says that the U.S. labor
market has improved enough so that it will not need big government
spending to reach full employment. She even went as far as to say that
her predecessor at the Fed, Ben Bernanke, called for fiscal stimulus
when “employment was much higher than it is now.”
Trump and the Fed are going to fight this year over how much stimulus
is appropriate which could cast doubts on whether Trump gets the $1
Trillion he has promised to rebuilt the infrastructure of the U.S.