Thinking about potential crises which might occur soon is, for most people, a pointless and unhealthy pastime – but not for traders! This is because anticipating a crisis before it happens can be a great way to make money, even if it seems sad to profit from the fear and consternation of others. It is the nature of human psychology to underestimate the probability of crises – by definition, unexpected events are unexpected, and tend to be more unexpected than they should be.
The effect of this psychological situation is that the payout offered on crisis situations is usually mispriced in the trader’s favor. Think of it this way: if you go to a betting shop and ask to see the bets on offer which pay out at 100:1, they probably actually have a greater probability of winning than these odds imply (e.g. instead of a 1% change of winning, a more correct figure might be 2% or 3%). It is the same in financial markets, because the crowd does not like to aim for the long-shots and lose most of the time.
So, since we’ve established that trading political or financial crises is a good way to make money, let’s examine what might be likely to go seriously “wrong” in 2017!
Breakup of the European Union
Three key political events are scheduled for 2017 within the European Union. Firstly, there will be a Dutch General Election which will be held on March 15, 2017. Almost all the opinion polls conducted within the last six weeks are showing Geert Wilders’ PVV emerging as the largest single party. The party advocates a Dutch withdrawal from the European Union. A victory for the PVV will not necessarily lead to Wilders becoming Prime Minister, but the party’s attack on Dutch and European “consensus” will mean a good result for the PVV will almost certainly shake the Euro.
A French Presidential election will be held on April 23, 2017. All opinion polls have, for several months, been pointing to a two-horse race between the candidate of the center-right party and Marine Le Pen of the Front National, with Le Pen losing by a decreasing but meaningful margin. A Front National victory in this election would be a huge political earthquake and Le Pen has promised French voters a referendum on EU membership. A victory by her would certainly rock the Euro, and a French exit from the European Union would effectively finish off the entire project and lead to the demise of the Euro.
Finally, a German general election must be held at some date before October 22, 2017. Opinion polls show that a change of government is certainly possible, but it looks very unlikely that the anti-consensus Alternative for Germany party could emerge as the largest party.
Of course, a victory for anti-EU forces in the Netherlands and France could trigger major political movements in opinion, so if the German election is held late it might be very affected by what has happened in France and to a lesser extent, in the Netherlands. The British vote to exit in 2016 has given anti-EU forces a tailwind.
Military Clash Between China and the U.S. and/or U.S. Ally
It is well-known that president-elect Donald Trump has used some very undiplomatic language against China both during his campaign and since his election victory. Trump ran on a platform of blaming China for abusing the terms of its enormous trade with the U.S and for currency manipulation. It is unclear how much of this was part of his election crusade in favor of the U.S. manufacturing industry, so much of which is now based in China. It might also be that his public embrace of Taiwan is another hardball negotiating tactic for when he tries to reset relations between his administration and China. However, it comes against a backdrop of increasing Chinese power and confidence, which has included strategically aggressive basing moves deep into the South China sea, as well as a distancing of the U.S. from its traditional regional allies such as the Philippines. A military clash in this area might happen, and could rock global markets, sending stocks tumbling and driving cash into safe-haven assets such as the Swiss Franc, though probably not the Japanese Yen.
Both President Trump and the Chinese government will probably work hard to stop such a clash from happening, but it still may happen especially if there are moments of increasing tension between the players.
Successful North Korean Weaponized ICBM
A few days ago, the dictator of North Korea, Kim Jong Un, announced that North Korea is on the threshold of a successful test of an ICBM. If such a missile were successfully produced and weaponized, it would put the United States within range of a North Korean nuclear strike. Last summer, North Korea successfully fired a ballistic missile over Japan, demonstrating that a capability to strike Japan was now seemingly dependent solely upon an ability to weaponize.
President-elect Trump derided North Korea’s claim, and it is widely seen as unrealistic. However, if the experts are wrong and North Korea unexpectedly carries out a successful test of an ICBM, tensions with the United States will ratchet up considerably and markets will be rattled.
Profiting from Crisis
Obviously, there are many other potential crises that could arise in the next twelve months, but it is hard to spot any others that will have a clear outcome on a single asset. It is possible to bet on a high level of unusual volatility (but that is outside the scope of retail Forex brokers), or a cheap option on stock market indices being significantly lower at some point during the year.
It is possible for retail Forex traders to pay particularly close attention to technical short set-ups in the EUR, whether against the USD, Gold, or another “safe-haven” instrument such as the JPY, and make such positions unusually large and durable. This way, if the Euro is hit by a sharp fall, you can already be positioned to benefit, particularly around the time of the Dutch and French elections in March and April.