Risks for the year ahead

In a stark contrast to January 2016’s crash, 2017 has set off in fine form, with traders so far choosing to ignore the potentially risky events which could be in the calendar for 2017 and instead jumping into the blue-chip index. In just over 30 minutes this morning the FTSE had rallied 58 points, to take it to a new record high of 7200. Whilst in January 2016 the FTSE dived over 170 points on the first day back from the Christmas and New Year break, drawing close to a 4-year low. Yet the irony here is that the outlook for 2017 is far from stable.

Whilst investors have been given several reasons to cheer today, such as the OPEC led oil production cuts being implemented (at least by Kuwait and Oman so far) and manufacturing figures across the globe soaring, especially here in the UK where they hit a 2.5 year high, the backdrop for the year looks set to be a volatile one.

Will the global oil glut come to an end?

Oil supply will continue to be in focus entering the new year, with a big question mark hanging over the extent by which Russia and Saudi Arabia will cut their production levels following the OPEC led deal. On the flipside, US shale production could come back with a bang as prices rise which would rock the balance once more. Whilst oil supply has played a big part in 2016, 2017 will also start to focus more on oil demand and with manufacturing picking up worldwide especially a more stable picture in China, the prospects are promising for underpinning the price. However, until the outstanding unknowns can be answered, the oil market will probably enter a wait and see mode, with prices sitting around the $55 a barrel handle.

Geopolitical changes

2017 will see us enter a period of geopolitical uncertainty where politics and international relations will change almost beyond the recognition of recent years and will impact onto the markets. Aside from all the political risks in Europe and the official starting of the divorce of the UK from the Europe Union, wild card Trump will take office as US President where protectionism is expected to play a central role in his policies. Added to that we should learn more about his intentions; the risk here is the Trump disappointment trade.

On news of his election many investors took leap of faith that wild card Trump will re-ignite the US economy, setting in motion the great rotation from bonds into equities. All four US indices have hit all-time highs since November 8^th, whilst the yield on the 10-year bond has jumped from a July low of 1.32% to 2.5% on prospects of economic growth and higher rates ahead. This could be a classic case of too much too soon and the market getting ahead of itself as it often does in these scenarios. The dollar is currently trading at a 14-year peak and the Trump policies that we are aware of are probably fully priced in now, yet could take around a year to be accomplished, which is a long time for the market to start feeling disappointed, leaving plenty of room for a sell off.