- OPEC Begins Plan to Cut Production
Coming off of its biggest annual gain since 2009, crude oil will be one market to watch in 2017. After breaking sharply at the start of 2016 then treading water for most of the year, crude oil prices surged from mid-November to the end of the year into prices not seen since mid-2015.
In late November, OPEC and non-OPEC countries reached a deal to cut output by 1.8 million barrels a day in 2017 beginning on January 1. The plan is designed to reduce the global supply glut and stabilize prices.
Since this is considered a landmark deal and it begins on January 1, we’re going to make this event number 1.
- The Inauguration of Donald Trump
The second event to watch in 2017 is the inauguration of Donald Trump as President of the United States on January 20. Trump inauguration speech could move the stock market in a major way if he sticks with the campaign slogan that helped get him elected, “Make America Great Again”.
- OPEC Compliance Meeting in Vienna
OPEC will be back in focus again in January for event number 3. On January 21-22, the first meeting of a committee of OPEC and non-OPEC nations responsible for monitoring compliance with a global agreement to reduce oil output will be held in Vienna.
Since the deal relies on 100% compliance by the nations involved, this committee was set-up to catch any cheaters and to fix problems that may arise quickly. Given OPEC member history of non-compliance with agreements in the past, this meeting will be important because the deal may need to be reinforced early to set the right tone for the rest of the year.
- First Fed Meeting of 2017 (and others)
The first U.S. Federal Reserve Bank monetary policy meeting for the year will be held in January. At this meeting, the central bank will have the opportunity to raise its benchmark interest rate a little more than a month after its last rate hike. Since it projected as many as three rate hikes in 2017, every meeting will be important because of the possibility of a rate hike.
There is no doubt that investors remember last year at this time when the Fed was promising four rate hikes in 2016 and delivered only one in December. This being said, investors will be paying close attention to the Fed at each meeting and especially at the quarterly meetings in March, June, September and December because the Fed is expected to make is projections at these meetings.
Any reduction or increase in the frequency of rate hikes could cause volatility spikes in the markets.
- End of March: The U.K. Government Triggers Article 50
In June 2016, the U.K. voted to leave the European Union and this triggered a volatile response in the markets while driving the British Pound sharply lower. In October 2016, the British Pound dropped sharply again after U.K. Prime Minister Theresa May said she would file Article 50 no later than the end of March 2017.
The negotiations needed for Britain to leave the EU can only begin with the formal filing of Article 50. The complicated negotiations are expected to take two years to complete. This is a long time for investors to remain patient so I expect renewed volatility and a further decline in the British Pound in reaction to this event.
- European Elections
In keeping with the political theme generated by Brexit and subsequent events, several key elections in Europe could stress the European Union and the Euro Zone economy. Last year, we had the Brexit vote, a referendum in Italy and a run-off presidential vote in Austria. This year, France will elect a new president on April 23.
The low approval rating of current President Francois Hollande gives far-right National Front leader Marine Le Pen a chance to win the election. She has said that if she wins, she would hold a referendum to leave the EU and the Euro currency.
On March 15, Holland will hold a general election that could alter the outlook for the European economy. And Germany must hold a federal election before October 22. Current Chancellor Angela Merkel will be going toe-to-toe with the nationalist Alternative fur Deutschland party. The key issues surrounding the election are Germany’s EU membership and the “open door” immigration policy.
- Iran Holds Presidential Elections on May 19
Currently, the front-runner in the election is President Hassan Rouhani. After negotiating the 2015 nuclear deal with several Western nations and getting the economic sanctions lifted, he is likely to bump heads with U.S. President Donald Trump, if he decides to scrap the current nuclear agreement. Rising tensions could disrupt the crude oil market.
- Trump, China and Trade Issues
China’s economy in 2016 stabilized and deflation pressures eased. The People’s Bank of China may even lower interest rates further while attempting to ease the pressure from high debt levels. However, all of this could come to a screeching halt if Trump gets into a major trade riff with China.
Donald Trump candidate called China a currency manipulator and promised to add a huge tariff to all Chinese imports. He also talked about ending, what he considers to be unfavorable trade agreements. Trump could create a major anti-trade situation with China that could spread to other emerging markets.
- End of the Global Monetary Policy Easing Cycle
Will 2017 see the end of rate cuts and quantitative easing? 2016 ended with the global economy showing signs of an upturn. However, the U.S. was the only country that raised its benchmark interest rate. Questions remain about the other major central banks. Will the Bank of England be forced to take action to prop up the U.K. economy or the British Pound? Will the European Central Bank begin to taper or set an end date for its quantitative easing program? Will the ECB and the Bank of Japan be forced by rising interest rates to abandon its negative interest rate policy? Are the Australian and New Zealand economies ready for a rate hike?
- Trump’s Economic Policies will Clash with Fed Policy
Trump went head to head with Fed Chair Janet Yellen during the presidential campaign, but both seem to have made nice since Trump won the election. Although the Fed has said there is nothing wrong with stimulating the economy through fiscal spending like Trump plans to do, they have said that the spending carries a lot of responsibility.
Trump’s policies are expected to be inflationary. The Fed has some leeway there since consumer inflation is currently below their 2.0% target, but how high will the central bank allow inflation to rise above this level before it takes action to drive inflation back down?
Trump has also promised jobs, but Yellen says that the U.S. labor market has improved enough so that it will not need big government spending to reach full employment. She even went as far as to say that her predecessor at the Fed, Ben Bernanke, called for fiscal stimulus when “employment was much higher than it is now.”
Trump and the Fed are going to fight this year over how much stimulus is appropriate which could cast doubts on whether Trump gets the $1 Trillion he has promised to rebuilt the infrastructure of the U.S.