In the current environment, it almost seems more appropriate to re-label economic sentiment as geopolitical sentiment. There is no doubt economic sentiment is being shifted by geopolitical changes, with Brexit negotiations and a Trump presidency quickly changing market expectations for growth.
There are no policies being proposed that give us confidence 3% growth will be delivered
According to market expectations, the Federal Reserve will hike rates considerably through 2017, with some commentators claiming at least three hikes are priced in.
This rhetoric follows the theory that a Trump presidency will accelerate growth to something akin to 3%. It is a healthy practice to view these projections with scepticism, as similar projections were made only months ago that the U.S. could slip into a mild recession.
Regarding Trump’s influence, there are no concrete policies being proposed that would give us confidence 3% growth will be delivered. For example, his $1 trillion infrastructure binge, if successfully passed, seems like a significant sum, however the U.S. are already spending more than $3.3 trillion on gross fixed capital formation per year, up from $2.7 trillion in 2009, and have struggled to impact the numbers to date. There are also further doubts about any funding mechanism that will afford a fiscal programme.
Debt levels in the U.S. are already at $20 trillion and set to breach the debt limit again in February/March 2017, extending this may prove harder than most people realise as 60 senate votes are required. In short, it shouldn’t come as a surprise if the predictions are wrong.
There are plenty of other macro risk factors on the horizon which could easily get consumers and business sidetracked. The first major risk is the outcome of the Italian referendum, which has greater sentiment implications than usual due to the contagion risks within Europe. With the sustainability of the European Union under increasing suspicion, Brexit may be the first of possibly several dominos.
One of the other clear challenges will be the interaction between emerging markets and global growth. Brazil, Russia, India and China will be central to this extended recovery, although global trade is slipping. The World Trade Organisation (WTO) have stated that global trade volumes are set to be lower than GDP growth for the first time in 15 years.
What Next for Commodities?
Commodities remain a sensitive and wildly volatile area of the markets with significant underlying diversity. For instance, there are disparities between the sentiment for gold, silver, oil markets, hard commodities, soft commodities and livestock; all of which are causing volatility in prices. Take the nine months since the turn of the commodity crash; gold is up 14%, crude oil 10.9%, iron ore up more than 100% and livestock suffering a loss of -18.4%.
Therefore, considering “commodities” as an overarching basket has its complications, with the net result a muddied picture of fund flows.
If we were to single out the biggest driver of this sentiment, it would be underlying level of gold speculation. Gold activity has been increasing at a rampant pace. However, this activity tends to heavily influence the short-term price of gold.
