London: Politics, economics and finance have all been turned on their head in 2016, and investors are already looking ahead to 2017 with anticipation and trepidation.

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

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 US 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 US bond yields to historic lows, says bond yields may well rise next year and expects 10-year Treasury yields to hit 2.5 per cent.

But in the first quarter.

After that, HSBC’s bond strategist Steven Major reckons they will fall back sharply again to 1.35 per cent — effectively retesting the multi-decade low struck this year — because an initial rise to 2.5 per cent 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 globalisation, 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 US bond yield bottomed out at 2.088 per cent. It’s 3 per cent 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/system from political uncertainty (30 per cent risk factor), the steep increases in bond yields (25 per cent), a hard landing in China (25 per cent risk factor), and trade wars (15 per cent).

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 US 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.

One is going long on an equally weighted FX basket of Brazilian real, Russian rouble, Indonesian rupiah and South African rand versus short on an equally weighted basket of Korean won and Singapore dollar to earn “the good carry”. The other is going long Brazilian, Indian and Polish equities.

6. More QE from the ECB?

Inflation has bottomed out, the Fed is raising rates, and other central banks are beginning to reduce their stimulus. The ECB will taper its €80 billion-a-month QE programme, right? Maybe not.

RBC Capital Markets expects the ECB to not only extend QE in December, but to consider extending it again later next year as inflation and growth fall short. “Even towards the end of 2017, the discussion will be very similar to that seen at present: how can the ECB continue to stimulate the economy?” That could widen the already yawning gap between US and Eurozone yields. The 10-year spread this week hit its widest in over quarter of a century (210 basis points) and a fall in the 2-year German yield to a record low -0.74 PCT pushed the spread to its widest in a decade (185 bps).

7. $1 trillion US earnings bonanza

How much offshore earnings can US companies bring back if president-elect Trump follows through with his pledge to cut corporate tax? About $1 trillion, according to estimates by Deutsche Bank. This could give US stocks, already at record highs, another shot in the arm. Citi reckons global equities will rise 10 per cent next year, led by developed market indices.

A 10 per cent rise in the dollar and cut in US corporation tax to 20 per cent could add 6 per cent 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 Index will end next year at 4,400 points versus 3,241 currently — a 36 per cent increase. It also sees EPS growth at 6 PCT, up from a previous forecast of 4 PCT. This is predicated on there being no “significant” US-China trade protectionism conflict, although the threat of such a conflict and the relatively early stage of the Chinese recovery will keep domestic monetary conditions loose in the first half of 2017. Tougher property sector rules are also starting to divert wealthy individuals’ capital towards stocks, MS says. “Overall, we expect a more extended and subdued bull market than last time.” If they’re right, 36 per cent isn’t too shabby in anyone’s books.

9. For no yuan

Many FX analysts expect the Chinese yuan to continue falling, but few see it breaking below 8.00 per dollar. Those at Deutsche Bank do, and if they are right, it will imply a further depreciation of 15 per cent or more. To be fair, they see it breaking the psychological 8.00 barrier “by 2018”. But that would still mark a steady and sizeable fall next year for a currency tightly controlled by Beijing. A rising dollar is one side of the equation. And on the other, Deutsche reckons Beijing will not want to see reserves fall below $3 trillion, meaning capital outflows will hit the currency harder than the last couple of years when reserves have been used to cushion the yuan’s fall.