Strong start to 2017 a year with plenty of risk ahead

European political risk 2017

A positive start as the markets are in “back to school” mode after the Christmas break, with the FTSE popping higher; is this setting the tone for the rest of 2017? 2016 was a very big year for global politics but it looks like European politics is set to be the big story for 2017. In addition to elections in France and Germany, there is also the Netherlands and possible snap elections in Italy and Greece; there is a real possibility that around 75% of the euro region could be in play in 2017. Following Brexit and Trump, if 2016 taught us something, it is that you can’t discount anything. All this political risk in Europe will play out to a backdrop of Brexit and Trump taking office; we know the actors, we know the story but we just don’t know how it will play out.

Manufacturing in focus

Focusing on today’s action, manufacturing data is under the spotlight. Encouraging data from China, where the manufacturing PMI print was 51.9 in December, up from 50.9 and the highest since 2013, shows China to be in a much more stable position as we kick off the new year; whilst economic activity is expected to increase further as we head towards the Chinese Luna New Year. As a result, commodity prices are showing strength and supporting the miners.

UK manufacturing data is due later this morning and is expected to show that that UK economy slowed slightly but continued to demonstrate resilience at the end of 2016. A reading of 53 is forecast for December, against a print of 53.4 for the previous month, once again blowing away doomsdayers who predicted the UK economy falling off a steep cliff following the Brexit vote back in June. The said, Brexit still actually hasn’t happened yet, so come the second quarter of this year, once Article 50 has been triggered, we could be looking at a more depressing picture, but unlikely to be the Armageddon that was forecast.

A stronger than expected reading for UK manufacturing could give sterling an extra boost and give the ongoing recovery in the major fresh legs. A break above 1.2300 could open the doors to 1.2335, whereas on the flip slide a move below 1.2270/60 could drag GBPUSD back towards 1.2225.

Oil starts new year higher

Oil is on the rise as we kick off the new year, after its biggest annual gain since 2009, it continues to power higher, as cuts in oil production by Kuwait signal that OPEC and other oil producing nations will put into force the cuts promised and start to stabilise the oil market. Kuwait reportedly has cut output by 130,000 barrels per day to 2.75 million per day. Countries such as Kuwait are expected to implement the cuts diligently, but nations such as Russia and Iraq are the ones that the markets will have the biggest concerns over; it remains to be seen whether they will follow suit.

Elsewhere, US drillers targeting crude in the US have added rigs for a 9th week, boosting the number to the highest in a year. Should the production cuts be implemented and the price of oil heads towards $60 a barrel, then an increase in the number of US rigs will remain the biggest threat to price stability and limit oil from rising further.