Markets have settled into their traditional holiday lull and with many countries on bank holiday today (and in effect, for the entire week), there's little prospect of an imminent pick-up in market action until the new year. For those traders who are nonetheless stuck at their desks, including yours truly, this week marks a great opportunity to review the developments from 2016 and develop a plan to make 2017 the most profitable year yet.
While there were plenty of memorable moments this year, 2016 was the year of the populist revolt above all else. From Brexit to Trump to Italy's constitutional referendum, the masses made their distaste with the status quo heard through the ballot box, regardless of the consequences. The reverberations from these decisions will no doubt be felt for years and decades to come, but the biggest takeaway for 2017 may be that "political risk" is still on the rise -- especially in Europe.
European Elections
The coming year will bring a presidential election in France, where the far-right National Front party has been gaining ground of late, as well as national elections in Germany and the Netherlands. These represent three of the largest and most important economies in Europe, and depending on how these votes go, political uncertainty could throw the region back into recession in 2017. At the very least, investors will hesitate to put capital to work in those regions until the elections have passed.
The coming year will also mark a shift from ballot-box shocks to the nitty-gritty realm of policy development in the UK and US. The situations in these countries is, quite literally, unprecedented. There is no roadmap to manage a withdrawal from a "permanent" politico-economic union of countries or how a reality TV star/real estate investor with no prior government experience will develop policy.
Based on the recent price action in the pound, global FX traders are increasingly skeptical that UK policymakers will be able to engineer a so-called "soft" Brexit, at least without significant concessions. That said, there is cautious optimism that the process won't be too disruptive, and the FTSE remains elevated as firms enjoy a "honeymoon period" with legacy market access and a depressed valuation of the pound sterling. The start of negotiations in the first half of 2017 will determine whether that honeymoon period extends throughout the year or whether investors' optimism is misplaced.
Status Quo Vs. Change
Across the pond, traders remain bullish on the prospects for the US economy. Broad US stock markets are testing all-time highs, with the US Dollar Index at a 14-year high. Investor confidence seems to be based on the prospect of pro-business policies from the incoming, Republican controlled government combined with anticipation of a infrastructure-led boost to GDP growth. While investors in the UK seem to be cautiously betting on a continuation of the status quo, US investors are pricing in fairly radical changes to the current political environment. 2017 should bring us the answer to which, if either, of these views is more reasonable.
Whatever the coming year brings, we'll work tirelessly to capitalize on the trends and trading opportunities that develop. Here's to a happy, healthy, and most importantly, profitable New Year!