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BTMU Economic Brief | February 20172
bottomed, in part thanks to recent OPEC agreement to limit production (see Theme #3 below).
Indeed, estimates from the likes of Wood Mackenzie suggest that capex in the oil and gas
sector will reach US$450bn, which represents an increase of 3% on the previous year and
reversal of two years of steep declines.
Theme #2: Markets likely to remain in thrall to Donald Trump
The convincing electoral victory of Donald Trump over Hillary Clinton late last year, while
unexpected, was well received by the markets. While this rally – dubbed the “Trumpflation
trade” has lost some momentum recently, our sense is that it has further to run, especially if
Trump embarks on implementing his planned fiscal stimulus – made up of tax cuts and
infrastructure spending – which will ultimately serve to reflate the economy and boost growth.
Over and above this, Trump’s commitment to a deregulatory drive is likely, in our mind, to
continue to be looked upon positively on the part of the markets, with for example the equity
markets biding-up energy related stocks in the belief that some of the environmental regulation
which currently exist in the US may be watered down somewhat under a Trump administration.
Elsewhere, but on rather negative note, markets have taken the view that with growth set to
take off under the leadership of Trump, they have started to fret about inflationary
consequences of such a move, especially given the fact that the US economy already appears
to be at, or near, full employment, as a consequence of which wage growth appears to have
gained meaningful traction2
. Indeed, reflecting this, futures markets expectations of inflation
have risen sharply since the election of Trump (see Chart 3).
2
Average hourly earnings rose to a seven-year high of 2.9% in December
45
50
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10 11 12 13 14 15 16 17
US UK
Euro Area China
Japan
Chart 1: PMI Surveys Point to a Synchronised
Uptick in Growth...
(Reading>50 denotes expansion)
Source: Macrobond, BTMU Economic Research Office
(Year)
0.8
0.9
1
1.1
1.2
1.3
1.4
10 11 12 13 14 15 16 17
US UK Euro Area China Japan
Chart 2: ... A Trend Which Appears to be Confirmed by
a Favourable Evolution of the New Orders/Inventories
Ratio(Ratio)
(Year)

Against this backdrop, our sense is that risk assets, such as US equities will, on balance,
continue to do well, while the US dollar may also benefit from any prospective rises in US
interest rates in response to the build-up of inflationary pressures (see Chart 4). Conversely,
defensive assets, such as US Treasuries, will likely continue to sell-off if inflationary pressures
start to build on the back of higher growth. Elsewhere, with Trump likely to place a high priority
on domestic infrastructure spending in the US, this could, along with further signs of firming
growth at the global level, lead to a further leg-up in commodity prices as we progress through
this year (see Theme #3 below). That said, there are a number of caveats in relation to the
aforementioned points that are worth noting here:
First, if the arrival of Trump causes an unsustainable move upwards in the US dollar (e.g.
parity or beyond versus the euro), it could undermine the prospects of S&P500 companies
which have a high reliance on foreign currency earnings.
Second, and on a related note, a rising US dollar may undermine commodity prices, most
of which tend to be denominated in the US currency.
Third, the low level of market volatility and high correlations across different asset classes –
which have characterised the markets in recent years – may be set to change going
forward as the US Fed embarks on normalising its policy settings, while greater policy
uncertainty under Trump, e.g. in terms of what emphasis he puts on his pro-growth versus
protectionist agenda, may instil greater uncertainty in the mind of investors and, as such,
focus their attention on the issue of who the winner and losers will be under his
stewardship. This, in our mind, is likely to revive an interest in an “active” (versus “passive”)
approach to investing going forward.
Finally, while the likelihood of an activist fiscal policy under a Trump administration has
been much touted, it’s important to note that fiscal policy works with inherent time lags.
Infrastructure spending would have to pass Congress, and would take time to be
implemented and longer still to feed through to the economy. With this in mind, we think
that the beneficial effects of such a policy may become more apparent in 2018 rather than
this year.
0.8
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1.2
1.4
1.6
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Jan 16 Apr 16 Jul 16 Oct 16 Jan 17
(YoY, %)
Chart 3: The Market's Inflation Expectations have
Spiked Upwards in the Belief that a Trump Presidency
will Serve to Boost Growth...
Trump
election
victory
100
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104
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Nov16 Dec16 Jan17
Dollar index S&P 500
Chart 4: ... And This, In Turn, Has Served as a Leg-Up
for US Equity Markets and the Dollar
(YoY, %)

Theme #3: Commodity markets set to see further light at the end of the
tunnel
With continued progress being made to reduce the overhang of excess supply across a
number of commodity markets, we expect the prospects for the commodity markets as a whole
to undergo further improvements this year. A case in point, is the oil market which – on the
back of the recent agreement encompassing both OPEC and non-OPEC member states to
pare back production to the tune of 1.8m b/d – has seen prices rebound rather smartly (from
around US$45-50/barrel to a figure in the region of US$55/barrel), such that at current levels
prices remain above key technical level (see Chart 5). While there is a risk that oil prices may
relapse if actual production cuts are not forthcoming, we think that – given the deteriorating
fiscal dynamics across OPEC member states recently – there will be enough buy-in for the
deal for oil prices to be underpinned at least around their present levels. That said, as the deal
stands, we do not envision prices rising to such an extent that would allow most OPEC
member states to breakeven in terms of their underlying fiscal and current account positions
(see Chart 6).
Additionally, it’s also worth mentioning here that on the back of the OPEC-induced oil price
rises that we have seen since start of December, the reaction function of US shale oil
producers – which over the past decade or so have upended the traditional workings of the oil
industry – will clearly be of some importance going forward. Our sense is that in light of the
efficiency/operational improvements that the shale oil producers have undergone recently to
survive the current oil price rout, they will be tempted to ramp up production if, on the back of
the aforementioned OPEC cuts, prices continue to trend upwards from their current levels of
around US$55/b. Indeed, with the US rig count – and the associated rise in US oil production –
already seeing a noticeable pickup since hitting a low-point last year (see Chart 7), we expect
this trend to continue to play out this year, especially if oil prices continue to exhibit an upward
bias going forward.
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120
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10 11 12 13 14 15 16 17
Brent crude 200 MA 50 MA
Chart 5: Oil Prices Continue to Hover above Key
Technical Levels...(US$/barrel)
(Year)
0
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Chart 6: ... But Despite This Prevailing Prices Remain
Shy of the Levels Required to Balance OPEC
Members Fiscal and External Balances
(Source) Macrobond, BTMU Economic Research Office

Beyond oil, base metals will also continue on the road to recovery. This will be helped by
recent production cutbacks by global mining companies, such as Glencore, as well as efforts
that are being made in China to remove excess capacity among certain state owned
enterprises that are active in the commodity arena. On the demand side, with the Chinese
authorities looking to continue to prop-up growth at around the 6.5% level in 2017, metals
demand from the country is likely remain supportive. This, coupled with the prospect of
stepped-up demand from the US this year and next, particularly for construction and related
commodities, will in our mind provide additional support for copper and other cyclical metal
prices going forwards. That said, with metals prices, such as iron ore, already experiencing a
substantial run-up in prices in 2016 – in excess of 90% in the case of iron ore – some pull-back
in prices cannot be ruled in 2017.
Theme #4: A pivot from monetary to fiscal policy
Central banks have done most of the heavy lifting in terms of propping up growth and financial
markets around the globe since the outbreak of the global financial crisis, such that they have
essentially become the “only game in town”. But that may be set to change as the persistence
of such policies has caused unintended side-effects, including asset price bubbles and
distortions in wealth distribution, all of which have undermined potential growth and caused a
backlash to develop against the existing policy regime (see Figure 1). With this in mind, the
pendulum – aided by rising populism – has increasingly shifted in favour of activist fiscal and
populist policy measures. That said, for the most part, this pivot will continue to occur
gradually and highly accommodative monetary policy will remain in place within most
countries. Nevertheless, the US, may prove something of an exception given the fact that the
country was already on the path to tightening monetary policy in response to improving
economic fundamentals. Additionally, there is a risk that the anticipated fiscal boost from the
new Trump administration may accelerate this pace.
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Total number of US rigs (left axis)
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Chart 7: US Rig Count VS. Oil Production
(Barrels per day, millions)(Rigs)
(Year)

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that populist tendencies are also sweeping across a range of other European countries as well
(see Chart 11). Adding these concerns is the fact that forthcoming elections are also due in the
likes of the Netherland’s, France and Germany this year, all of which have seen growing
support for populist and non-mainstream political parties. Of these elections, perhaps of most
significance for us is the French election, where the far-right National Front candidate, Marine
Le Pen, has built up significant momentum, with opinion polls suggesting that she is likely to
progress to the second round of voting. While, on balance, we do not expect her to win, such
an eventuality cannot be dismissed out of hand. For one thing, she has cultivated a
widespread following, particularly among disenchanted sections of the French population
which, as we saw last year, proved to be decisive in the case of the Brexit vote and the
electoral victory of Trump. For another, if she were to unexpectedly win the second round of
the election, it could cause a major market dislocation, such as that seen during the 2011-12
Eurozone debt crisis and, not to mention, undermine the already fragile integrity of the
Eurozone as a whole, not least given the fact she has already declared that she wants to take
France out of the Eurozone.
Notwithstanding the pessimism noted above, it is worth highlighting that, thus far, we have
seen few non-mainstream parties gain full political power within the EU. Rather, what we have
seen is the fact that the growing popularity of such parties has enabled them to exert greater
influence on the policy debate and, in line with this, many mainstream parties have adopted
slightly sanitised versions of their proposals and policies as their own. Perhaps a good
example of this is the UK Conservative party which, after the Brexit vote, has adapted its policy
position, particularly in relation to issues such as the EU and immigration, to be more closely in
line with that of the UK populist party, UKIP.
Theme #7: Banks back in vogue
Since the financial crisis, global banks have been faced with a litany of headwinds, not least
rather sluggish economic growth, poor profitability, onerous regulations and rising NPL
problems. However, we think that 2017 could be the year that banks start to turn the corner.
Indeed, market sentiment towards the sector already appears to be improving, particularly in
the US, and we think that this trend will run further helped by the following factors:
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Chart 11: Number of Europeans Espousing Authoritatian/Populist Views
(Total, %)

First, economic growth which, as we’ve alluded to above, is set to improve somewhat,
particularly among the developed market economies.
Second, under the Trump administration, the regulatory burden on banks may be pared
back somewhat, with talk that his government may repeal the Dodd-Frank Act.
Third, the problem of NPLs appears to have peaked, including in Europe, with the
exception of some peripheral economies, such as Italy.
Finally, with global interest rates set to rise going forward, led by the US, this will help to
improve the net interest margin (NIM) and, hence, profitability position of banks.
Conclusion
After a turbulent 2016, markets are rightly anxious about the year ahead. That said, with the
global economy showing signs of modest improvement and the election of Donald Trump
adding to this positive sentiment – though not universally shared – we’re of the view that
markets will be more willing to embrace greater risk this year, with cyclical plays, such as the
banks and those active in the commodity arena, likely to be in vogue within the equities
universe. However, with the political trajectory going forward this year likely to be uncertain,
thanks to the rise of populist forces – especially in Europe where a number of key elections are
due this year – our sense is that caution is still warranted. Additionally, with the policy-mix
between monetary and fiscal policy in the developed markets, particularly the US, also in a
state of flux, how this shift is manged and ultimately plays out will, in our mind, also have an
important bearing for the global markets/economy during the course of this year.
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BTMU Economic Brief - macro themes 2017

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BTMU Economic Brief - macro themes 2017