A year defined by bubbles, brawls, Brexit and brent

December 29, 2017 08:49 AM

This has certainly been another eventful trading year for financial markets, as investors juggled with numerous themes throughout 2017.

Market players marched into the trading year adopting a risk-on attitude, amid growing optimism over Donald Trump pushing ahead with a large fiscal spending package. The “trump effect” not only elevated global stocks to 19-month highs in January, but also sent the U.S. dollar to its highest level in 14 years. In February, the series of pending elections in Europe, ongoing Brexit developments and heightened Trump uncertainties, made political risk a recurrent theme during the first quarter of 2017. Although during the same month Trump made promises of a “phenomenal” tax plan, the growing threat of him moving forward with the protectionist policies while overlooking the proposed fiscal stimulus, weighed heavily on investor sentiment.

It was all about Brexit fuelled anxiety and Trump jitters in March, which ultimately supported safe-haven assets such as Gold while investors fled to safety. The Federal Reserve moved forward with a “dovish hike” in the same month which punished the Dollar further. The unsavoury combination of geopolitical tensions and political risk circling the French presidential elections in Europe, weighed heavily on risk sentiment in April. Financial markets eventually received a boost near the end of the month, after Centrist Emmanuel Macron secured a position in the second round of the French presidential elections.

OPEC was in focus in May after the cartel thoroughly underwhelmed participants by renewing an agreement to cap output by 1.8 million barrels a day until March 2018. With the rapid resurgence of U.S. Shale complicating the cartel's efforts to rebalance markets, most investors were hoping for deeper production cuts to quell oversupply woes. The disappointment exposed oil prices to downside risks, with the commodity eventually tumbling into a bear market in June. The Fed was also in focus in June as it defied a string of weak inflation figures by raising U.S. interest rates for the second time in 2017.

A cautious Federal Reserve in July sent the dollar to fresh 13 month lows against a basket of major currencies. Although the central bank signalled that it would begin shrinking its massive holding of bonds “relatively soon”, the heightened concerns over inflation remaining “somewhat below 2%” in the near term, weighed on investor sentiment. In August, the vulnerable Dollar was battered further by the political drama in Washington, while global stocks were punished by geopolitical tensions across the globe. 

North Korea stole the spotlight in September after testing its most powerful nuclear bomb yet. Demand for safe-haven assets received a boost amid the geopolitical risk during the trading month- with gold jumping to a yearly high at $1,357 per ounce

Much focus was directed towards the Catalonia developments in October which fanned concerns about the future of the European Union. The mighty Euro came under selling pressure in October after preliminary results from the Catalonia referendum showed 90% of Catalans were in favour of independence. What really exposed the currency to heavy losses, occurred near the end of the month, after Catalonia officially declared independence from Spain. What I found interesting was how the European Central Bank moved forward with a “dovish taper” during the same month, by announcing that from January, it would taper its bond-buying to €30 billion from €60 billion per month.

Bitcoin was also the talk of the town across financial markets in October, after the cryptocurrency conquered the $5,000 barrier.

After over a decade, the Bank of England finally lifted interest rates by 25 basis points to 0.5%, from the 0.25% record low in November; despite this, Sterling still depreciated. With the central bank cautioning that future rate increases would be “at a gradual pace” and to “a limited extent”, the markets interpreted this as a dovish hike. The mounting political uncertainty at home and Brexit risk added salt to the Pound’s injuries. The cryptocurrency craze reached new heights in November, as Bitcoin concluded the month near $10,000.

In December, the Federal Reserve raised U.S. interest rates for the third time this year but this was already heavily priced in. The same could be said for the muted market reaction, despite the U.S. Congress passing President Donald Trump’s $1.5 trillion tax overhaul.

I believe December was dedicated to market chatter around cryptocurrency, with Bitcoin aggressively appreciating to all-time highs of $19,783 before sharply tumbling lower. With Bitcoin and other cryptocurrencies appreciating considerably this year, most are asking if similar gains will be exhibited in 2018. As 2017 slowly comes to an end, investors may start pondering how Trump’s $1.5 trillion tax overhaul will influence the Dollar next year.

About the Author

Lukman Otunuga is an FXTM research analyst