Major political upheaval was top on the list of factors affecting financial markets in 2016, with market movements characterised, most notably, by June’s Brexit vote and the shock result of November’s US presidential election. In line with this, the first week of 2017 kicked off with a host of predictions, outlooks and advice on how to navigate the financial markets over the next 12 months – a period that will see a number of European elections, the development of the new Trump Administration, and, likely, the UK Government triggering Article 50 and beginning the formal process of exiting the EU.
Key market movements
While there are many issues facing financial markets this year, Hussein Sayed, chief market strategist at FXTM, highlights in CPI Financial
the progression of the Trump stock market rally, and the future of the UK and the EU, as crucial focus areas.
All US major indices achieved new highs after the presidential election in November – the Dow Jones industrial average climbed 8%, the S&P 500 and Nasdaq composite rose 5%, and the small-cap stock market index Russell 2000 jumped more than 13%. Sayed adds, “The expected combination of financial stimulus and deregulation for some sectors under Trump’s presidency were the main catalysts for the rally.”
However, he cautions, “The downside risk in 2017 is likely to be larger than the upside potential”. He adds, “If US policy makers succeed in delivering the anticipated growth we can see another 5-10% gains in US stocks, but failure to do so will result in a sharp selloff that could exceed 20%.”
In the UK, the Brexit path is still very much uncertain. The pound closed 2016 17.5% lower against the US dollar in the aftermath of the June vote, according to Sayed. “Much will depend on the path Britain will choose,” he adds, pointing out the Prime Minister’s promise of triggering Article 50 by the end of March. A delay could well be on the cards, depending on the Supreme Court ruling on whether parliamentary approval is required to trigger Article 50. Any delay in triggering Article 50 could have a positive impact, in the short-term, on the pound, says Sayed. Investors will likely focus on the economic developments and the direction of the Bank of England’s monetary policy, he notes.
CPI Financial article
Growth, prices and rates
Furthermore, Brexit talks and rising inflation are expected to cause a slowdown in the UK’s economic growth this year, due to their impact on the pound, according to Financial Reporter’s
Rozi Jones. The Office for Budget Responsibility forecasts growth to fall by 2.4 percentage points, as a “direct result of the decision to leave the EU”.
A slowdown in growth will likely result in employment pressures, says Halifax’s housing economist, Martin Ellis. “This deterioration in the labour market, together with an expected squeeze on households’ spending power – as inflation picks up and outpaces earnings growth later in the year – is likely to curb housing demand,” he says.
How much growth is predicted to fall because of Brexit, according to the OBR
However, on the plus side, slower economic growth should result in a fall in house price growth over the next few months. An average house price growth of between 1% and 4% is predicted in 2017 – the relatively wide range reflecting “the higher than normal degree of uncertainty regarding the prospects for the UK” this year.
Other positives for the housing market are also expected in 2017 – including good mortgage opportunities for first-time buyers and encouraging signs in the house-building sector – despite economic uncertainty, with new opportunities for brokers and lenders to support consumers.
Financial Reporter article
As continually asserted by financial institutions, industry bodies and media outlets alike, it is still very much uncertain how the events of this year will pan out. In keeping with this, writing for Money Observer
, Andrew Bell, director and CEO of Witan Investment Trust, asserts that investors must not “assume or over-react” in 2017. Despite the risk of political surprises, or 'known unknowns', “the lesson from 2016 was that pre-judged responses could miss the message from incoming news”.
Events throughout 2017 “could increase short-term volatility”, however economic developments will have the most impact, says Bell. Despite the fact that increased growth and higher inflation appear possible, “technology, debt levels and abundant supply are secular depressants on inflation, while any fiscal package will take time to agree and implement, so the boost to growth may be gradual”.
Bell concludes that investors must bear in mind that adaptability and being realistic are vital traits for the coming year.
Money Observer article
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