Global Economy – What’s Next?

In my last article of 2015, I highlighted five key themes that market participants would expect in the year. These themes included crude oil, currency, corporate earnings, rate hikes, and elections. Clearly, we witnessed these themes throughout the year. In this article regarding global economy, I will highlight a number of market themes that will drive the financial market in the coming year and will affect the global economy.

#1 – Federal Reserve

We will start the year with a new sheriff in town. Donald Trump will be sworn in four weeks from now. Trump has spoken against the federal reserve headed by Janet Yellen. She featured prominently in his last campaign advert. In the first debate, Trump mentioned that the fed was compromised and used by the executive to boost Obama’s ratings. He warned that the economy would tank as soon as a rate hike is triggered, and that will affect the global economy. Yellen has stated that she will serve her full tenure. Therefore, we expect a few issues in the federal reserve when dealing with the new administration. While many experts anticipate three rate hikes, I believe that the fed will have two rate hikes in June and September.

#2 – Elections

In Europe, we will have a number of elections. In France, the incumbent, Francois Hollande has stated that he will not stand for reelection. This is probably because of his low ratings. This will lead to a new president. In Germany, Chancellor Angela Merkel has stated that she will stand in the election scheduled for October. In Italy, I believe that a rightist movement will come up following the recent happenings where the government will rescue the troubled financial institutions. These themes will dominate Europe during this time.

#3 – Crude Oil

Crude oil will be a key theme in the financial world in 2017. Recently, oil producers agreed to cut their production. This is anticipated to increase the price of crude oil. However, the path to high oil prices will not be a smooth one. I believe that a number of countries will be accused of cheating. This tag of war between the OPEC and non-OPEC member countries could lead to instability in the oil prices.

#4 – Trade Wars

Donald Trump campaigned on a nationalist platform. He campaigned on the belief that the previous trade deals had denied Americans an opportunity to grow. He said that he would renegotiate NAFTA. He also mentioned that he would oppose the Trans Pacific Partnership (TPP). He has also mentioned that China is the main problem for the United States. He said that he would name China a currency manipulator. He has also warmed up to Vladimir Putin in a bid to make Russia an ally. All these measures could lead to a trade war. In fact, Carl Icahn, a senior advisor to the president has mentioned that the US will be better off having a trade war with China immediately.

#5 – New World Order

US has had really bad relations with many countries under Obama. The country has had bad relations with Israel and Russia. This week, Russia mentioned that all communications had been closed between the two countries. US has accused Russia of hacking its relations. Trump believes that Russia should be an ally of the country. He has promised to negotiate with the country for a better deal. Trump has also promised to be tough on China which is plotting to retaliate against Trump. Trump has challenged the UN, NATO, and the European Union. He has promised to force Mexico to pay for the Trump Wall. This New World Order could have a number of implications that are difficult to model.

#6 – Currencies, Commodities, and Inflation

Emerging market currencies such as those of Mexico, Brazil, and China are expected to decline as the US adopts new measures and as the economy strengthens. The dollar and the Ruble are expected to gain as the two countries forge a reset. Commodity prices are expected to go up as oil countries recover. Inflation on the other hand will go up as money is returned back to the United States.

Global Economy – Useful Links

  • Discover more market themes of 2017 on Bloomberg
  • Read more about market theme for the new year on DailyFX

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