December saw the US Federal Reserve carrying out its third rate hike for 2017, as expected, while increasing expectations for US economic growth and forecasting three further rate hikes for 2018. With US inflation remaining low, it appears that the Fed will continue down the current path of gradual monetary policy normalization despite the higher growth expectations, which has been helped by the passing of tax reforms by the Congress.
Looking ahead into 2018, analysts pointed to US tax reforms as possibly causing the US dollar to strengthen in the first quarter helped by US companies repatriating capital held overseas. While the Trump administration appears to see US growth jumping to 4% due to tax reforms, the Fed’s latest minutes show that it sees a much more moderate impact.
As 2017 came to a close the volatility in emerging market stocks seems to have increased, with the 30-day historical volatility on the MSCI EM Index climbing to its highest in almost 12 months. This could have been because investors were caught in a conundrum, stuck between the possibility of global growth driving further EM gains and the risk of tighter monetary policy affecting EM assets, leading some to take profit from the gains of 2017. Nevertheless, the Institute for International Finance noted that 2017 recorded $235bn in portfolio capital inflows to EMs; the highest since 2014.
Pakistan presented an interesting case in December, being able to comfortably raise $2.5bn in dollar debt despite the domestic political uncertainty and balance of payment imbalances, which have prompted foreign investors to move away from Pakistani stocks. Neighboring India has seen the budget deficit for the first eight months of the fiscal year jumping to 112% of the full-year target, prompting increased borrowing and reducing the space for the Modi government to adopt populist policies ahead of the 2019 elections, amidst slower growth.
Brent oil prices stayed above the US$60 mark, with a new two-year high of US$67.02 being reached on the 26th. Prices continued to be held up by hopes of the supply glut ending in 2018, as the OPEC-led group extended the production limitation at their November meeting. Helping prices has been the oil pipeline closures in UK and Libya, a strike by oil workers in Nigeria and promises by Saudi and Russia that any exit from production cuts would be gradual. But gains have been capped by concerns about rising US oil output amidst higher prices.
Source: Frontier Blog