With the New Year on the horizon it’s time to take a look back over 2017 and explore what happened to the big calls that were being made at the beginning of the year.
The Trump Trade
At the start of the year, the main market focus was the newly appointed US President Trump and the prospect of massive fiscal stimulus and an “America First” policy agenda which was expected to see an explosion in US rates, driving USD higher. Trump vowed to renegotiate trade deals, such as NAFTA, to benefit the US’s position, apply trade tariffs and levies, to boost US profitability as well as reform the healthcare system and the tax system.
The most attention-grabbing element of his promises however, was his massive infrastructure spending package in the region of $500 billion which would be funded through taking on new debt, not through reduced spending in other areas or through higher taxation. Trump’s radical proposal ignited a massive rally in the industrial metals complex as speculators ploughed in anticipating a surge in demand once the project got underway, while Equity prices also soared higher as the President’s policy proposals fueled expectations of a surge in growth.
Given the expectations around Trump’s policy proposals, investors were also ramping up their Fed hiking expectations as higher US growth and inflation pointed to a more aggressive tightening path than the Fed was itself projecting at the time.
So, this was the situation at the start of the year. US rates were increasing. The US Dollar was sitting just off multi year highs, equities were surging along with industrial metals and the market was expecting an aggressive USD bull phase to be the lead theme of the year. The idea was known as the “Trump trade” and was the biggest consensus call for 2017 with everyone from major investment banks through to small retail traders looking to join the party.
However, over a year into his tenure it is clear that the Trump trade has failed and failed very quickly after seeing an aggressive market reaction. There has been no infrastructure spending, Trump has failed to renegotiate NAFTA. The only import levy so far has been on Canadian soft lumber. Trump was defeated in his efforts to reform the healthcare system by removing Obamacare and is currently fighting to put his tax reform plan through.
The market response was swift. As it became clear early on in the year that Trump was not delivering on his promises, the large USD long position that had built up, began unwinding rapidly. The selloff continued over the year and deepened as Trump was defeated on Obamacare. The market quickly realised that Trump was not following the plan of the proposals he set out during his election campaign and also, that he was not effective in getting proposals passed.
So, over the course of the year then, after opening in the high 102s the USD Index fell to a low of 91 before seeing a small rebound over the last few months linked to better us data.
Europe to Fall About as Populist Parties Gain Power
Away from the US, one of the other key themes was the political situation in Europe and the increased risk of populist, Eurosceptic parties coming to power in key economic states such as France & Germany.
A massive increase in immigration to Europe over the last five years along with a surge in terror attacks had fueled a large increase in far-right support across the Eurozone. In France and Germany, the two main far-right parties were seeing surging support in the polls and many investment banks highlighted the very real risk of these parties coming to power, which would undermine the strength of the Eurozone and the euro itself.
Marine Le Pen’s National Front party promised to pull France out of the Euro if they came to power and as the party breezed through the first round of voting, there was growing sensationalism among mainstream media sources suggesting that the Euro would be rocked by a surprise outcome. However, ultimately Le Pen’s party failed to come to power.
Focus then shifted to the German elections where the far right AfD party saw a similar surge in support. Once again, mainstream media highlighted that the Eurozone was on the brink and the Euro would collapse. However, as with the French elections, the election passed without the AfD coming to power, although they did secure seats in the Bundestag for the first time, gaining over 10% of the vote.
In smaller elections such as the Dutch and Austrian elections, populist parties were also defeated meaning that all the fear and bluster being peddled at the start of the year had virtually passed by summer and was then forgotten into the second half of the year. The Euro remained unscathed and continued to strengthen over the year.
EURUSD rose from a starting level of 1.05 to a high of 1.20, defying calls at the start of the year that parity would be the next key milestone for the pair.
Staying in Europe then, the next key theme at the start of the year and one of the big consensus calls was that the UK economy would disintegrate due to Brexit and that negotiations would fail leaving the UK to crash out of the EU without securing a trade deal. Many investment banks were highlighting the catastrophic risks from Brexit, saying that the UK would become a second-class economy.
However, UK data following the Brexit referendum remained strong and over the year, the UK economy has visibly strengthened with growth and inflation both rising, Unemployment falling and manufacturing and service sector strength remaining buoyant.
Indeed, the market was taken by surprise as the BOE began striking a much more hawkish tone in its meetings, highlighting the likelihood of a rate rise being necessary given the trajectory of the economy. As data continued to highlight economic strength, despite admitting the risks from Brexit, the bank moved rates higher for the first time in a decade in November and raised its inflation and growth outlook.
After opening the year around 1.2350 GBPUSD traded back up to a high of 1.3560s, and is currently sitting around 1.34, still over a thousand pips higher on the year.