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Wed 11 Jan 2017 01:17 PM

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Donald Trump remains an unknown entity

The US president-elect has already had a major effect on financial markets, but the long term impact remains unknown

Donald Trump remains an unknown entity
Crude control Production cuts among OPEC and non-OPEC members will likely balance the oil markets in the first half of this year, Madiyeh says.

Donald Trump’s victory in the US presidential election has already had major effects on the financial markets. In contrast to many predictions beforehand, investors have generally interpreted Mr Trump’s proposals as favourable to nominal growth prospects. The rebound in breakeven inflation, for example, suggests investors may see more balanced risks to inflation in the years ahead.

While markets have taken a dimmer view on some of Mr Trump’s policies — likely those related to trade restrictions, tariff increases, and perhaps immigration law changes — the negative effects have been narrowly concentrated at this stage. Moreover, there has been little concern to date about more hawkish leadership at the Federal Reserve.

Thus, since Mr Trump’s win, investors appear to see the potential for: (1) effective fiscal stimulus, (2) limited disruptions to trade, and (3) relatively dovish appointments to the Fed.

We will be watching the transition process in 2017 closely to see whether these assumptions will hold. Much is still unknown, however, and the initial market reactions could evolve as the new administration’s policy proposals and appointments take shape.

The impact of the Trump win on November 8, 2016 continues to be felt across all asset classes with the prospect of growth-friendly policies and the potential of rising inflation having led to new record highs on Wall Street, while bond yields have spiked and the dollar has rallied. In addition to this, OPEC’s decision to cut production meant that December certainly turned out to be a month full of surprises.

Amid those circumstances, gold has been hurt. The gold price dropped to the lowest level in ten months declining by more than 12 percent since the US election. But gold has since held above the main support level of $1,154 per ounce. This probably indicates that most of the selling pressure we’ve seen, particularly in the futures market, has started to fade. Some may take a view that most of the bad news for gold has now been priced in, given the sharp sell-off and the sharp reduction we’ve seen in positioning.

As expected, the Federal Reserve raised rates by 25 basis points at its meeting on December 14, 2016. Rate hikes traditionally weigh on gold, as rising US rates increase the opportunity cost of holding non-yielding bullion, while boosting the dollar, the currency in which the metal is priced.

As we enter 2017 we will digest more details on Mr Trump’s policy. The surprise may be that the growth outlook and inflation figures in the US in particular, and the rest of the world in general, do not pick up. Or Mr Trump may not deliver what he has promised the markets in terms of lowering corporate taxes and investing billions in infrastructure investments. This scenario could lead to a sharp increase in gold prices again, where we see gold prices above the $1,300-1,350 per ounce level again and maybe $1,400 in the second half of 2017.

Away from gold and into the oil markets. OPEC had managed lately to agree on cutting production by 1.2 million barrels per day by January, which was necessary to remove the oversupply and stabilise the oil markets. A record-breaking amount of buying was seen following the OPEC deal, with the historic agreement helping to send crude oil prices sharply higher.

According to the data, we find that the buying of West Texas Intermediate crude oil during the initial surge was driven by short-covering. The net-long jumped by 81,399 lots, the second highest on record. This was only surpassed by an 84,000 lots increased in August when the Saudi energy minister raised the prospect of ending the pump and dump strategy for the first time.

All in all, OPEC and non-OPEC cuts will likely balance the oil markets in the first half of 2017 at least. While following a relative calm beginning to 2017, two obstacles still remain. Firstly, compliance with production will be difficult to read until the first quarter of this year, as OPEC has a history of poor compliance and we will need to wait to see if non-OPEC nations deliver the 560,000 barrel reduction with most cuts expected from Russia.

Secondly, we are keen to see what kind of response is received from US shale producers, with many of which are now able to speed up production at levels above $55 per barrel.

In the scenario that OPEC and non-OPEC parties do not meet their promises, that may lead to a sharp sell-off in oil markets, causing it to decline to $40-45 levels by the end of the first quarter of 2017.

Raid Madiyeh, Global Sales Trader, Saxo Bank

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