(Adds Deutsche Bank's Chinese yuan forecast)
By Jamie McGeever
LONDON Dec 2 Politics, economics and finance
have all been turned on their head in 2016, and investors are
already looking ahead to 2017 with anticipation and trepidation.
The consensus, broadly, is that the 35-year bull market in
bonds is over, inflation is back, central banks are maxed out,
and for the first time in a decade any stimulus to the global
economy will now come from governments.
The implications for markets appear to be further increases
in bond yields, developed world stocks and the dollar, while
emerging market currencies, stocks and bonds are expected to
struggle under the weight of higher U.S. bond yields.
In equities, developed markets are favoured over emerging,
cyclical sectors over defensive, banks are expected to benefit
from steepening bond yield curves, while infrastructure spending
could boost housing and construction stocks.
That's the consensus. But what goes against that grain?
Where might the wrinkles appear? And even within the broad
consensus, are there any eye-catching forecasts or trade
1. Bond yields to FALL?
HSBC, who correctly called the recent slide in U.S. bond
yields to historic lows, says bond yields may well rise next
year and expects 10-year Treasury yields to hit 2.5 percent.
But in the first quarter.
After that, HSBC's bond strategist Steven Major reckons they
will fall back sharply again to 1.35 percent - effectively
retesting the multi-decade low struck this year - because an
initial rise to 2.5 percent would be unsustainable by tightening
financial conditions, dragging on the economy and constraining
the Fed. A bold call.
2. "Peak" 2016
For Bank of America Merrill Lynch, 2016 saw "peak liquidity,
peak inequality, peak globalization, peak deflation" and the end
of the biggest ever bull market in bonds. That all starts to
reverse next year. "For the first time since 2006, there will be
no big easing of monetary policy in the G7, and interest rates
and inflation will surprise to the upside."
They even pin a date on when the bond bull run likely ended:
July 11, 2016, when the 30-year U.S. bond yield bottomed out at
2.088 percent. It's 3 percent today.
3. Black Swans
Economists at Societe Generale illustrate a graphic with
four "black swans" that could blight the global economic and
market landscape next year for good or bad. Mostly bad news. The
tail risks they see as most likely to alter next year's outlook
stem from political uncertainty (30 percent risk factor), the
steep increases in bond yields (25 percent), a hard landing in
China (25 percent risk factor), and trade wars (15 percent).
4. The euro also rises
"The dollar is overvalued versus other G10 currencies." Not
something you hear too often, but it's the view of Swiss wealth
management giant UBS. They predict the euro will end next year
at $1.20, going against the growing calls for parity (it hit a
one-year low below $1.06 last week) or even lower. The euro will
also draw support from the ECB tapering its QE, while
undervalued sterling will pick itself up from its Brexit mauling
to rally against the greenback.
5. The "good carry" in EM
Few dispute that a higher dollar and U.S. yields next year
will hurt emerging markets. Goldman Sachs has long championed a
stronger dollar and higher yields. Two of their top 2017 trade
tips, however, involve buying EM assets.
One is going long on an equally weighted FX basket of
Brazilian real, Russian rouble, Indonesian rupiah and South
African rand versus short on an equally weighted basket of
Korean won and Singapore dollar to earn "the good carry". The
other is going long Brazilian, Indian and Polish equities.
6. More QE from the ECB?
Inflation has bottomed out, the Fed is raising rates, and
other central banks are beginning to reduce their stimulus. The
ECB will taper its 80 billion euros-a-month QE programme, right?
RBC Capital Markets expects the ECB to not only extend QE in
December, but to consider extending it again later next year as
inflation and growth fall short. "Even towards the end of 2017,
the discussion will be very similar to that seen at present: how
can the ECB continue to stimulate the economy?"
That could widen the already yawning gap between U.S. and
euro zone yields. The 10-year spread this week hit its widest in
over quarter of a century (210 basis points) and a fall in the
2-year German yield to a record low -0.74 pct pushed the spread
to its widest in a decade (185 bps).
7. $1 trillion U.S. earnings bonanza
How much offshore earnings can U.S. companies bring back if
president-elect Trump follows through with his pledge to cut
corporate tax? About $1 trillion, according to estimates by
Deutsche Bank. This could give U.S. stocks, already at record
highs, another shot in the arm. Citi reckons global equities
will rise 10 percent next year, led by developed market indices.
A 10 percent rise in the dollar and cut in U.S. corporation tax
to 20 percent could add 6 percent to global earnings per share.
"If other countries also cut taxes then EPS could rise further,
even against an uninspiring economic backdrop."
8. China shop bull returns
Chinese stocks will bounce back into a roaring bull market,
predicts Morgan Stanley. It reckons the Shanghai Composite index
will end next year at 4,400 points versus 3,241 currently - a 36
percent increase. It also sees EPS growth at 6 pct, up from a
previous forecast of 4 pct. This is predicated on there being no
"significant" U.S.-China trade protectionism conflict, although
the threat of such a conflict and the relatively early stage of
the Chinese recovery will keep domestic monetary conditions
loose in the first half of 2017. Tougher property sector rules
are also starting to divert wealthy individuals' capital towards
stocks, MS says. "Overall, we expect a more extended and subdued
bull market than last time." If they're right, 36 percent isn't
too shabby in anyone's books.
9. For No Yuan
Many FX analysts expect the Chinese yuan to continue
falling, but few see it breaking below 8.00 per dollar. Those at
Deutsche Bank do, and if they are right, it will imply a further
depreciation of 15 percent or more. To be fair, they see it
breaking the psychological 8.00 barrier "by 2018". But that
would still mark a steady and sizeable fall next year for a
currency tightly controlled by Beijing. A rising dollar is one
side of the equation. And on the other, Deutsche reckons Beijing
will not want to see reserves fall below $3 trillion, meaning
capital outflows will hit the currency harder than the last
couple of years when reserves have been used to cushion the
(Reporting by Jamie McGeever; Additional reporting by Atul
Prakash and Vikram Subhedar; Editing by Jeremy Gaunt)