“Twas the Friday before Christmas and all through the house, …”
Wait. To hell with that. There’s no way I’m playing the “cram a market narrative into a familiar Christmas poem” game. What I would say though, as we head into the holiday weekend, is that in many ways the setup for 2017 feels a lot like the setup for 2016.
Think about it. We’ve got a December Fed hike in the books, worries about China, a strong dollar, and a year of political upheaval to look forward to.
The question, of course, is whether things accidentally turn out for the better (in terms of risk assets) as they did in 2016 and whether the macro traders of the world will seize the day and capitalize on the numerous black swans that might come calling. (As a side note, I’d be shocked if HY manages a 16% gain in 2017 and almost as shocked if the S&P can tack on another 14%).
On the political tail risk front, all eyes will of course be on Europe and on Donald Trump (just as in 2016) only now the stakes are higher as the new US President (accidentally I hope) revives talk of a Cold War-style nuclear arms race while France and Germany brace for what promise to be highly divisive elections.
Put on your hedges.
Here with more is former FX trader and Bloomberg contributor Mark Cudmore…
Deja-Vu All Over Again
It’s my last working day for 2016 and as I reflect on the past 12 months, it makes me think that next year may feel more familiar than many believe.
- We’ll start the year excited by an inflation pick-up and the U.S. tightening cycle. While there’s been clear progress during the past 12 months, both may disappoint elevated expectations yet again
- Base effects will help headline inflation jump next year but structural disinflationary pressures from technology and demographics won’t just vanish
- As for U.S. rate hikes, it’s been ripe territory for constant disappointment for several years. With the dollar providing a chunk of tightening already, and the risk that Trump protectionist policies de-rail growth, the FOMC is still looking optimistic with its 3 hikes for next year
- Perennial China worries remain. And I see even less reason to suddenly find them valid right now. Officials have successfully boosted growth, while debt problems remain a long-term evolving concern rather than at immediate crisis point
- Emerging markets were supposedly doomed in 2016. That was wrong. And they will outperform expectations again next year. Global growth is picking up and most emerging markets are still undervalued from the major selloff of the previous five years
- Last year, we thought the euro and the pound would be under pressure. And while they certainly weakened, neither travelled the path expected. 2017 may be similar in that the consensus direction transpires but in a manner that’s difficult to trade
- However, on the biggest issue of 2016 — political surprises — I hope we don’t have too many replays
- On a positive final note, I do believe it will be an excellent year for macro trading, and your Christmas reading of research notes won’t be immediately invalidated this time around. Happy holidays
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I do not wish to repeat the first 2 months of 2016 again. Made up for it but not a pleasant time.
Agree, stocks are at least short term overbought and bonds especially those with an EM flavor are oversold.