Last week, I made a prediction about improving global growth prospects and rising commodity prices next year. This week, I am going to talk about another three possible trends in 2017.
First will be the end of bull market for bonds.
Assuming global economic growth picks up next year, along with rising costs due to a combination of rising resources prices and stronger demand, reflation is a likely scenario.
Due to aggressive monetary easing by major countries, global bond yields have dropped to a ridiculously low level, with long-dated euro and Japanese government bonds dipping into negative yields.
Against the prospect of higher inflation, bond markets will experience strong selling pressure.
In fact, global bond yields have been rebounding recently.
Technically, 3 percent is a critical resistance level for 10-year US Treasury bonds. If that level is breached, it can rise all the way back to 6 percent.
Regarding US interest rates, I expect there will be at least three quarter-point hikes next year.
Rising inflation, if realized, will be the key factor behind a tighter US interest rate policy next year. And the Federal Reserve may raise rates at a faster clip than most people expect.
The unemployment rate and various inflation indicators suggest that a reasonable Fed fund rate should be about 3.8-4.55 percent, according to the Taylor rule.
The Fed is seriously behind the curve at present.
On the currency front, get ready for a much stronger US dollar, powered by a stronger economy and rising rates.
US President-elect Donald Trump has vowed to encourage large US technology companies to bring hundreds of billions of dollars overseas home with a favorable tax rate.
As much as US$2.5 trillion could flow back into America. That will also boost the US dollar.
Meanwhile, driven by political uncertainty in Europe and the potential of continued fund outflows from the region, the euro may drop to 0.94 against the greenback.
Currencies of resources-rich countries such as Canada, Australia and New Zealand will be supported by higher commodity prices, offsetting some pressure from the strong dollar trend.
This article appeared in the Hong Kong Economic Journal on Dec. 15
Translation by Julie Zhu
[Chinese version 中文版]
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