Talking Points:
- A number of high profile developments shook the markets in 2016 including: the US election, second Fed hike and Brexit
- Global tensions are growing and multiplying heading into the new year with Brexit and vows of disruptive US policy
- Systemic issues such as the divergence in speculative value and effectiveness of monetary policy steadily build pressure
See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.
We are heading into 2017 with a laundry list of risks and uncertainties facing global investors. While it is not wise to actively invest with a 'worst case scenario' mentality - just as it is not reasonable expecting the 'best case' - we should nevertheless be aware of the probable threats moving forward. It is important to account for the risks moving forward that are both significant but also a reasonable chance of occurring. There are distinct risks like the progress on the UK's divorce from the Eurozone (Brexit) and the Fed's vow to hike three more times over the 12 month time frame. There are also more 'systemic' concerns such as the health of investor sentiment and the faltering of monetary policy effectiveness.
A common feature of the greatest risks moving forward is a lack of specific time and simple binary outcome. The Brexit for example was a simple vote this past June, but the details of what it represents to the UK economy and British pound depends heavily on negotiations as well as the reach that speculators have made in their assumptions. For the Fed's 2017 pace of policy tightening, the timing and impact of moves depends on the surrounding circumstances. More unwieldy is the rise of anti-trade sentiment the world over. Many players means many hot spots to generate trouble.
Even more deeply rooted and untethered to a specific event are the state of risk positioning and the growing troubles with monetary policy. For speculative exposure, the gap between risk-adjusted returns in the market (universally) and the cost to participate was wide years ago. The scale of the divergence and subsequent complacency to maintain it heading into 2017 are extreme. A collapse in this happy facade could translate into a rapid shift in global capital. For monetary policy, most major players are still sporting extreme stimulus programs. However, need for and effectiveness of these efforts is clearly hitting reasonable bounds. While a full turn from dovish to hawkish policy bearing is a lower likelihood in 2017, the intention to make such a move is likely to be clear. We discuss the top risks to the majors and broader markets in the year ahead in the recording of this video.
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