The implications for markets appear to be further increases in bond yields, developed world stocks and the dollar, while emerging market currencies, stocks and bonds are expected to struggle 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 benefit from steepening bond yield curves, while infrastructure spending could boost housing and construction stocks.
That's the consensus. But what goes against that grain? Where might the wrinkles appear? And even within the broad consensus, are there any eye-catching forecasts or trade recommendations?
1. Bond yields to FALL?
HSBC, who correctly called the recent slide in U.S. bond yields to historic lows, says bond yields may well rise next year 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 they will fall back sharply again to 1.35 percent - effectively retesting the multi-decade low struck this year - because an initial rise to 2.5 percent would be unsustainable by tightening financial conditions, dragging on the economy and constraining the 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 end of the biggest ever bull market in bonds. That all starts to reverse next year. "For the first time since 2006, there will be no big easing of monetary policy in the G7, and interest rates and 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 at 2.088 percent. It's 3 percent today.
3. Black Swans
Economists at Societe Generale illustrate a graphic with four "black swans" that could blight the global economic and market landscape next year for good or bad. Mostly bad news. The tail risks they see as most likely to alter next year's outlook stem from political uncertainty (30 percent risk factor), the steep increases in bond yields (25 percent), a hard landing in China (25 percent risk factor), and trade wars (15 percent).
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4. The euro also rises
"The dollar is overvalued versus other G10 currencies." Not something you hear too often, but it's the view of Swiss wealth management giant UBS. They predict the euro will end next year at $1.20, going against the growing calls for parity (it hit a one-year low below $1.06 last week) or even lower. The euro will also draw support from the ECB tapering its QE, while undervalued sterling will pick itself up from its Brexit mauling to rally against the greenback.
5. The "good carry" in EM
Few dispute that a higher dollar and U.S. yields next year will hurt emerging markets. Goldman Sachs has long championed a stronger dollar and higher yields. Two of their top 2017 trade tips, however, involve buying EM assets.
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Reuters
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