Markets Are Going to Roil Next Year

Trump, China and political populism are going to end a period of stability.

Prepare to be bounced.

Photographer: Chris Ware/Keystone Features/Getty Images

The European Central Bank reckons that financial market uncertainty, as measured by how far stocks, bonds and the euro are from historical norms, is currently close to zero, in contrast with elevated uncertainty during the recessions of 2009 and 2013:

Source: European Central Bank

The sheer range of known unknowns for 2017 -- the outlook for China’s economy, the effect of populism on European politics, the scattergun policy-making of president-elect Donald Trump -- makes a low level of uncertainty unlikely to persist. For each of the major financial asset classes, there are plenty of reasons to expect that price swings will become more violent next year.


Trump’s triumph in the U.S. presidential election produced a remarkable turnaround in stock market sentiment. The S&P 500 index had lost 5 percent of its gains by early November, and looked to be on track to end the year lower than it started.

The prospect of increased government spending, however, prompted a rally that’s seen record levels for U.S. equities, even though volatility is a tad lower than it was in 2015, a year when the S&P 500 ended the year little changed in value:

Source: Bloomberg

But Erik Nielsen, Italian bank UniCredit SpA’s chief economist in London, sums up the risk of placing too much faith in that post-election ascent:

I worry about the number of investors, as reflected in markets who seem to believe that Trump will do the policies they like -- fiscal stimulus -- and none of the crazy things he has flirted with -- tariffs and expelling illegal immigrants. What makes people confident in their ability to predict what he will -- and what he won’t -- do from the arsenal of (mostly incoherent) statements that are made?

As my Bloomberg News colleague Matt Townsend reports, the power of Trump’s Twitter feed makes companies nervous about its use as a bully pulpit reaching 17.3 million followers. The prospect of four years of the Trump cannon swinging from target to target -- both in business and politics -- has the potential to roil equity markets, even on a daily basis.


The currency market has already seen volatility accelerate to its fastest pace since 2012, as this chart shows:

Vol FX
Source: Bloomberg

But there’s much more scope for foreign exchange traders to get rattled next year. The Brexit referendum has already triggered a collapse in the pound; as divorce negotiations get underway between the U.K. and the European Union against a backdrop of French and German elections, the potential for increased euro gyrations is clear.

Arguably the biggest disruptor on the currency horizon is China. The yuan has posted its biggest annual decline in more than 20 years; Goldman Sachs reckons currency outflows mean a net $69.2 billion exited the nation in November, up from a monthly pace of about $50 billion since mid-year.

Incoming President Trump has already threatened to brand China a currency manipulator. With the dollar up a staggering 26 percent on a trade-weighted basis in the past five years, his administration may decide that the U.S. currency deserves some relief from its trading partners -- and pressuring China to halt the yuan’s slide could be a way to talk the dollar down.


For the first time in years, bond investors can play off a true divergence in monetary policy between the Federal Reserve and the European Central Bank, as illustrated in the contrast between two-year government bond yields for the U.S. and Germany:

Mind the Gap

Yield difference between higher U.S. two-year yield and lower German two-year yield

Source: Bloomberg

The Federal Reserve just introduced its second interest-rate increase in a year, and is promising three more hikes in 2017. The European Central Bank, by contrast, is still pledging to do whatever it takes to resuscitate growth and stimulate inflation. Against that backdrop, there’s scope for Treasury market volatility to surpass 2015’s jump and head back towards the levels seen in the first two years of the decade:

Vol Bonds
Source: Bloomberg

The year now ending made a fool of soothsayers. Nevertheless, I’m willing to stick my neck out and predict the following: Financial market volatility in the three main asset classes of currencies, bonds and stocks is likely to accelerate in 2017.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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    Mark Gilbert at

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