High interest rates and volatility for 2017

Institutional investors are in for an exceptionally volatile 2017 following the election of Donald Trump, Northern Trust believes.

Northern Trust chief economist, Carl Tannenbaum, told Super Review that he expected interest rates to continue to rise but that equity markets could be of concern.

"Since the election we've had important market movements in both our bonds and our equity markets. I think one of them has it right and the other doesn't," Tannenbaum said.

"What I'm struggling more with is the equity market which has done fantastically well. However, if I think about what any kind of restriction on trade would do it's not going to be very good for revenue growth, closed borders usually mean less job creation, and if you start thinking about individual market sectors the Fortune 500 sells a lot of stuff to emerging markets and we've talked earlier about how challenging it would be for emerging markets if that export challenge were to close."

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He said the bond market had correctly anticipated that inflation was more likely to be higher than lower and that the US fiscal position was more likely to be worse than better leading to higher interest rates.

"So, if I had to guess a month from now, interest rates would probably be continuing up but the market might moderate. Brexit had an initial market reaction that was quite harsh and then there was kind of a honeymoon period where people sort of said ‘well this might not be so bad'," he said.

"We could see some pretty good market performance until the key appointments are made, until the first policies are put through the Congress, and until the first consequences are seen. I think it's going to be an exceptionally volatile 2017."

Tannenbaum noted that there were major elections yet to happen in Europe and that it was possible that they could follow suit with a populist win.

"It's possible that the populists win the day and run the table and then you have to start thinking about the consequences of the banking system and the central bank," he said.

"On the campaign trail Mr Trump did not give the impression of someone that thinks one move ahead. But I'm hopeful and I'm trying to be hopeful that he'll surround himself with people with more perspective."