Peaks, Black Swans and Bonanzas: Market Tips, Bold Calls and Eyecatchers for 2017Peaks, Black Swans and Bonanzas: Market Tips, Bold Calls and Eyecatchers for 2017

By Jamie McGeever

LONDON, Dec 2 (Reuters) - Politics, economics and financehave all been turned on their head in 2016, and investors arealready looking ahead to 2017 with anticipation and trepidation.

The consensus, broadly, is that the 35-year bull market inbonds is over, inflation is back, central banks are maxed out,and for the first time in a decade any stimulus to the globaleconomy will now come from governments.

The implications for markets appear to be further increasesin bond yields, developed world stocks and the dollar, whileemerging market currencies, stocks and bonds are expected tostruggle under the weight of higher U.S. bond yields.

In equities, developed markets are favoured over emerging,cyclical sectors over defensive, banks are expected to benefitfrom steepening bond yield curves, while infrastructure spendingcould boost housing and construction stocks.

That's the consensus. But what goes against that grain?Where might the wrinkles appear? And even within the broadconsensus, are there any eye-catching forecasts or traderecommendations?

1. Bond yields to FALL?

HSBC, who correctly called the recent slide in U.S. bondyields to historic lows, says bond yields may well rise nextyear and expects 10-year Treasury yields to hit 2.5 percent.

But in the first quarter.

After that, HSBC's bond strategist Steven Major reckons theywill fall back sharply again to 1.35 percent - effectivelyretesting the multi-decade low struck this year - because aninitial rise to 2.5 percent would be unsustainable by tighteningfinancial conditions, dragging on the economy and constrainingthe Fed. A bold call.

2. "Peak" 2016

For Bank of America Merrill Lynch, 2016 saw "peak liquidity,peak inequality, peak globalization, peak deflation" and the endof the biggest ever bull market in bonds. That all starts toreverse next year. "For the first time since 2006, there will beno big easing of monetary policy in the G7, and interest ratesand inflation will surprise to the upside."

They even pin a date on when the bond bull run likely ended:July 11, 2016, when the 30-year U.S. bond yield bottomed out at2.088 percent. It's 3 percent today.

3. Black Swans

Economists at Societe Generale illustrate a graphic withfour "black swans" that could blight the global economic andmarket landscape next year for good or bad. Mostly bad news. Thetail risks they see as most likely to alter next year's outlook stem from political uncertainty (30 percent risk factor), thesteep increases in bond yields (25 percent), a hard landing inChina (25 percent risk factor), and trade wars (15 percent).

Link: http://tmsnrt.rs/2fYLTrP

4. The euro also rises

"The dollar is overvalued versus other G10 currencies." Notsomething you hear too often, but it's the view of Swiss wealthmanagement giant UBS. They predict the euro will end next yearat $1.20, going against the growing calls for parity (it hit aone-year low below $1.06 last week) or even lower. The euro willalso draw support from the ECB tapering its QE, whileundervalued sterling will pick itself up from its Brexit maulingto rally against the greenback.

5. The "good carry" in EM

Few dispute that a higher dollar and U.S. yields next yearwill hurt emerging markets. Goldman Sachs has long championed astronger dollar and higher yields. Two of their top 2017 tradetips, however, involve buying EM assets.

One is going long on an equally weighted FX basket ofBrazilian real, Russian rouble, Indonesian rupiah and SouthAfrican rand versus short on an equally weighted basket ofKorean won and Singapore dollar to earn "the good carry". Theother is going long Brazilian, Indian and Polish equities.

6. More QE from the ECB?

Inflation has bottomed out, the Fed is raising rates, andother central banks are beginning to reduce their stimulus. TheECB will taper its 80 billion euros-a-month QE programme, right?

Maybe not.

RBC Capital Markets expects the ECB to not only extend QE inDecember, but to consider extending it again later next year asinflation and growth fall short. "Even towards the end of 2017,the discussion will be very similar to that seen at present: howcan the ECB continue to stimulate the economy?"

That could widen the already yawning gap between U.S. andeuro zone yields. The 10-year spread this week hit its widest inover quarter of a century (210 basis points) and a fall in the2-year German yield to a record low -0.74 pct pushed the spreadto its widest in a decade (185 bps).

7. $1 trillion U.S. earnings bonanza

How much offshore earnings can U.S. companies bring back ifpresident-elect Trump follows through with his pledge to cutcorporate tax? About $1 trillion, according to estimates byDeutsche Bank. This could give U.S. stocks, already at recordhighs, another shot in the arm. Citi reckons global equitieswill rise 10 percent next year, led by developed market indices.A 10 percent rise in the dollar and cut in U.S. corporation taxto 20 percent could add 6 percent to global earnings per share."If other countries also cut taxes then EPS could rise further,even against an uninspiring economic backdrop."

8. China shop bull returns

Chinese stocks will bounce back into a roaring bull market,predicts Morgan Stanley. It reckons the Shanghai Composite indexwill end next year at 4,400 points versus 3,241 currently - a 36percent increase. It also sees EPS growth at 6 pct, up from aprevious forecast of 4 pct. This is predicated on there being no"significant" U.S.-China trade protectionism conflict, althoughthe threat of such a conflict and the relatively early stage ofthe Chinese recovery will keep domestic monetary conditionsloose in the first half of 2017. Tougher property sector rulesare also starting to divert wealthy individuals' capital towardsstocks, MS says. "Overall, we expect a more extended and subduedbull market than last time." If they're right, 36 percent isn'ttoo shabby in anyone's books.

9. For No Yuan

Many FX analysts expect the Chinese yuan to continuefalling, but few see it breaking below 8.00 per dollar. Those atDeutsche Bank do, and if they are right, it will imply a furtherdepreciation of 15 percent or more. To be fair, they see itbreaking the psychological 8.00 barrier "by 2018". But thatwould still mark a steady and sizeable fall next year for acurrency tightly controlled by Beijing. A rising dollar is oneside of the equation. And on the other, Deutsche reckons Beijingwill not want to see reserves fall below $3 trillion, meaningcapital outflows will hit the currency harder than the lastcouple of years when reserves have been used to cushion theyuan's fall. (Reporting by Jamie McGeever; Additional reporting by AtulPrakash and Vikram Subhedar; Editing by Jeremy Gaunt)