S&P sees Trump, Brexit impacting credit markets in 2017

Investors are expecting President-elect Donald Trump to stimulate the economy through tax cuts and infrastructure spending.

KUALA LUMPUR: Standar & Poor's global fixed income research expects geopolitical factors will have the greatest impact on global credit markets in 2017.

In its outlook report issued on Thursday, it cited the Trump Administration's currently unclear economic and trade policies, as well as the eventual implementation of Brexit, would create uncertainties. 

“These issues have a direct effect on the two largest economies (the US and the EU), with ripple effects expected to be felt globally. 

“Because of the relatively unexpected results of Brexit and the Trump victory, the future courses of these events could present a wider range of both upside and downside risks to our credit market measures,” it said. 

It made the comments in its report entitled, “Global credit market outlook: The conditions are set for heightened volatility in 2017”.

To recap,  S&P Global Fixed Income Research said as 2016 comes to an end, a look back at the year shows a very different picture than what most market participants and commentators expected.

It said that defying what most polls were showing in the lead-up to the elections, the UK voted to leave the EU in June, and Donald Trump defeated Hillary Clinton for the US presidency. 

These unexpected outcomes produced increased volatility in the financial markets immediately afterwards. In the case of Brexit, the effect has thus far mostly been short-lived outside of currency markets.

As for US monetary policy, its economists expected the Federal Reserve to  raise interest rates three to four times in 2016, “but the year is nearly over, and we have yet to see a single increase”. 

“One thing that we mostly expected was the increase in corporate defaults in the US oil and gas sector, though the full extent of the increase was underestimated,” it said. 

The head of S&P Global Fixed Income Research Diane Vazza said: "We expect market volatility across most asset classes to continue into next year. Most of this will likely be a continuation of the increased uncertainty from this year, rather than any certain downturn." 

“The potential for financial disruptions is higher than we previously expected, especially in light of the multiple, unexpected outcomes in 2016. 

“Still, we believe these factors are unlikely to have any major, negative impact on most of our core measures of credit markets--issuance trends, default rates, rating actions, and borrowing costs--for the coming year."