Duncan Donald

Mon, Dec 24

Weekly Markets Update - 24/12/2018

The whipsaw action of 2018 continued into last week as we saw the latest and perhaps last significant move of the year, following the US Federal Reserve interest rate decision. The event saw the Committee hike US interest rates by a further 25 basis points, and whilst this was broadly expected by markets, thanks to the persistent antagonism of the US President, it brought concerns and volatilities to financial markets, the type of which a telegraphed rate hike should certainly not have.

President Trump has most certainly enjoyed, and via his favorable media outlet “Twitter” has championed, the strength of the US markets during the early part of 2018. However, the shift towards higher interest rates by FOMC Chairman Jerome Powell and his Committee, have started to weigh heavily on the major equity indices.

Monetary policy committees were separated from political leadership for very good reason, as it allows for an impartial monetary policy decision-making process that should bypass political posturing. In light of Trump’s championing of the resurgence of the US markets seen under his leadership, he uncharacteristically of a President felt it necessary to claim credit for such success, as his creation. This, however, brings obvious downsides when markets deliver negative corrections. The absolute strength of the US economy seen throughout the last 18 months has of course led the Committee to believe that the economy is able to absorb the effects of rate hikes and this week brought the fourth hike of the year, bringing the benchmark rate range to 2.25-2.5%.

The key economic indicators in the US most certainly justify the actions of Jerome Powel and call into question the criticism tabled by Donald Trump.  Trump’s championing of the strength of the US equity markets has left him in a position whereby any downturn in markets places responsibility upon him. Therefore, the acts of the FOMC Chair has brought embarrassment to the President, resulting in his unprecedented criticism in the Committee’s rate hikes and outlook for a continuation of this cycle into 2019, bringing concerns of a global economic slowdown.

This has increased the confusion as to whether the FOMC were correct in their hiking decision, which brings speculative fear and was reflected in US equities as we saw their worst weekly performance in the last 3 months. Equity indices moved into negative territory for the year, after such a positive performance in the first half, as Powell reiterated the Committees commitment to rate hikes into 2019. The US yield curve has also pushed closer to inversion, the US Dollar seemed to lose the status of a safe haven currency which it enjoyed in the first half of the year, as the Japanese Yen appreciated and perhaps more surprisingly the Euro surged.

Having seen positive progression in the negotiations with Italy from the European Commission over the budget deficit earlier the week, the most recent in a long line of weighing factors on the Euro, the flight to safety brought Euro appreciation across the board, as real money investors who were perhaps underweight of Euro holdings, migrated out of the US Dollar. With the vulnerabilities of the British Pound being evident and the memories of the Swiss peg in investor’s minds it appeared a potential flight to comfort. This brought about a negative week in the US Dollar as stocks reversed, hanging precariously into the final week of the year.

In the UK there was no further progress seen on Brexit. As government closed for the year on Thursday, Theresa May remains in leadership despite questions remaining over her tenure from Nicola Sturgeon of the Scottish National party, and the opposition leader, Labour’s Jeremy Corbyn.  With the postponement of a parliamentary vote of confidence in the PM’s Brexit bill until January the 14th, whereby it is widely expected she will fail to achieve the required backing. With the contentious Irish backstop remaining, the speculation is that the PM is now working on additional “Plan B” which could entail a UK referendum, a national election or an extension of the departure date as her position of PM looks more vulnerable weekly. With the deadline for Brexit being now under 100 days, the expectation is on the PM to swiftly find a workable solution before the UK is plunged into further uncertainty. Naturally this continues to weigh on the Pound, whilst that inherent weakness is assisting the FTSE in the face of a global stock market downturn.

In the week ahead, we will naturally bear the impacts of the holiday season with the only meaningful data coming on the 27th with firstly the Bank of Japan’s Kuroda speaking, then US Consumer confidence data. However, the last week of the year will always bring volatility due to the reduced liquidity. With the current performance of the equity market, it would be expected that the month end/ year end rebalancing flows could bring high volatility in the currency market at 4pm UK time on December 31st.  All eyes will be on stock markets this week, and they will naturally lead the way across all asset classes.

We wish you all a wonderful holiday season and a great 2019.