As we herald a new year, the real action could be on the global front. Year 2016 was quite eventful. On the political front, Donald Trump was elected as the president of the US against all odds. Surprisingly, Britain voted in favour of moving out of the EU (popularly called BREXIT). On the economic front, oil prices nearly doubled during the year while gold gave up most of its gains in the last quarter of the year. But the big story was a hardening of yields in the US and the big hope that growth, spending and inflation could finally come back to the US. Here are some of the key global events to watch out for in 2017…
Focus on what Donald Trump will do…
This will be the big question once Trump assumes the presidency of the US in late January. He has already promised to make America great again. He has promised to get tough on illegal immigrants, rethink NAFTA treaties and build a wall along the border with Mexico. On the global front, the US will be less concerned about world affairs. This will mean reduced funding support to the NATO, reduced interference in the Middle East and West Asia and the beginning of the end to the cold war. But what Trump does economically will be more interesting. He has promised to cut individual and corporate taxes across the board and also invest a hefty $1 trillion in infrastructure. This is likely to create a virtuous cycle of spending, growth and inflation. A lot will, of course, depend on how Trump goes about in his first year in office, which is why 2017 becomes that much more critical.
Focus on Dollar and Oil …
The two global variables to watch will be dollar and oil. With the Fed likely to adopt a more hawkish policy, the dollar is only likely to get stronger from here on. The dollar index (DXY) is already quoting at a 13-year high and the next year also the strength is likely to continue. The combination of economic growth and higher interest rates is likely to keep the dollar strong. Oil could be a slightly more slippery affair. The supply quotas of the OPEC and the support from Russia and Mexico will kick off from January 01st. This is when the OPEC’s decision to cut oil production by 1.2 million barrels per day (bpd) will start. The big question for oil will be how the US shale reacts. To begin with, if oil prices cross the $60/bbl mark, a lot of shale wells that are in the sidelines are likely to become viable once again. It needs to be remembered that Trump wants to substantially oil’s footprint across the US and if that excess supply comes into the market, then prices could be depressed further. Either ways; oil and dollar will be key variables in year 2017.
Focus on how BREXIT actually pans out…
The BREXIT vote was, probably, the easier part. The real challenge ahead of Prime Minister, Theresa May, is how to make it work. Firstly, UK will lose its favoured-trader status within the EU and that will mean negotiating trade deals all over again. Secondly, BREXIT will also mean that global companies who were looking at London as a gateway to the European markets will have to do a rethink. They may choose to shift their European headquarters to Paris, Frankfurt or some other city in continental Europe. Alternatively, they may start looking at back-up plans. Either ways; London could surely lose some of its attraction as an international financial destination. Lastly, there is always the possibility that May can repudiate the BREXIT vote. While that is democratically difficult that is an option that is always available. Key developments could be seen in 2017.
Will the world become less global?
Will the world become less global? Look at some of the interesting trends. America is looking inwards. UK does not want to dilute its independence by being part of the EU. Countries across continental Europe are seeing the rise of Right Wing parties who are preaching the virtues of a more insulated approach to economic decisions. We have seen this trend in Greece, Italy, France and Germany. Across Europe there is concern over the cost of accommodating refugees from West Asia and this may force the whole of Europe to become more inward looking and less global. Increasingly, political parties that are talking more in terms of national interest and generating anti-foreigner sentiments are getting popular by the day. People saw the downsides of globalization for the first time in 2008 after Lehman exploded. Year 2017 may be the times to take a serious relook!
The big question on EM capital flows…
That will remain the billion dollar question. With the dollar likely to get stronger and emerging markets likely to face currency pressure, we could see a sharp reversal of capital flows in 2017. While India may still be relatively insulated due to its attractive yield spread, the key lies in how the currency is managed. We have seen in the past that the best of central banks can only manage the currency up to a point. Beyond that point, central banks only have two choices. They can either let the currency find its true value or impose capital controls. In fact, year 2016 did not see a big risk-off flow because the US Fed was still uncertain about the extent of hawkishness. If the Fed continues to adopt a hawkish stance in its next two policies on Feb 01st and March 15th, then the risk-off flows could really increase in pace and momentum. Capital flow controls, currently hard to imagine, is something a lot of EMs may start considering seriously.
In a nutshell, the US will continue to be the nucleus of the global economy and polity in 2017. Be it US spending, an insular polity, trade sanctions or a strong dollar, it will largely predicate on what the US does. The focus will be on the one man called Donald Trump!
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