Duncan Donald

Mon, Dec 31

Weekly Markets Update - 31/12/2018

In what has been a year of enormous volatility, this last week of December holidays did not fail to deliver. Having seen the great appreciation of the global stock market in the earlier part of the year, the last quarter brought the leading indices back down to earth with a bang. The once globally surging US markets which driven the market up, suddenly became the key driver to December’s downturn.  So much so, that despite the positive tone to the last full week of trading in 2018, in a week where US stocks showed their largest upswing since 2009, we still end the month 10% lower than where it started.

Naturally, fear of global slowdown impacts have suddenly become a hot topic. The potential causes have broadly been attributed to Brexit, Trade War and the Italy’s debt conflict with the European Commission.  But as we have seen in the last week, at least two of these factors are beginning to show strong signs of progress. Brexit remains broadly unclarified, with a great deal unresolved as we approach the March 29th, 2019 deadline.  In Italy, the populist government have finally passed a budget which meets the EC’s standards and may begin to aid in their concerning bond prices. The ongoing Trade War saga is even showing sign of progress recently, as was highlighted in a tweet from US President Trump over the weekend where he claimed talks were “moving together well” with China as they look to agree an ongoing trade deal beyond the Argentinean agreed truce earlier in December.  In the month where we saw initial concessions made between the two global trade leaders, and prior to the arrest and extradition demand from the US upon Huawei Chief Financial Officer Meng Wanzhou, a precarious situation which could have swiftly halted progression.  However, we have seen progress beyond expectation, as the US halted tariffs as China opened the door to investigation into the exploitation of intellectual property rights.

Despite this progression, the markets remain troubled, a factor which whilst not solely, could remain largely attributed to Donald Trump. His choice to question the head of his own monetary policy committee Jerome Powell, even claiming “they don’t have a feel for the market” has the global markets questioning the validity of the interest rate normalisation seen in 2018, and the committees current rate forecast for 2019. So much so, that we now have a situation where the forward guidance we are getting from the Federal Reserve, whereby we are to expect two further rate hikes (50 basis points) in 2019, is being wholly discounted, with the market merely attributing a 12% chance of one 25 basis point hike.  Trumps criticism of the Federal Reserve chair has been so continuous, that it led to concerns that both Powell and Treasury Secretary Steven Mnuchin could be in Trumps firing line, but this was rebuffed as untrue by Trumps Economic advisor Kevin Hassett on Christmas Eve.

Donald Trump’s tenure remains in question as we head into the second week of a government shutdown, caused by internal disagreement between the Republican and Democrat parties over his desire to build his border wall with Mexico.  Alongside this, concern that is beginning to show in his own party over his unforeseen removal of troops from Syria, leading to the resignation of his Defense Secretary Mattis, as well as the Presidents vulnerability to the Muller probe into collusion with Russia during his presidency campaign, leading to growing concerns, of his fitness and appropriateness for the senior role. Last week the New York Times journalist Elizabeth Drew, a journalist who was groundbreaking in writing on the President Nixon impeachment claiming that it seemed “inescapable” that impeachment would not be becoming of the President elect early this year, as he had become too great a burden to his own party.

Last month, global equities were majorly impacted resulting from the uncertainties in the future of the US Presidential tenure as well as forward guidance in the Feds monetary policy.  A flight to comfort into safe haven asset types was evident including both the Swiss Franc and Japanese Yen in currencies and Gold for commodities.  Gold had the strongest monthly gain in nearly 2 years, returning to challenge near the 1300 level not seen since June of 2018.  The move has been broadly due to the shift out of USD and currency gains were not limited to the JPY and CHF.  The International Monetary Fund (IMF) reported a reduction of US Dollar global reserve currency holdings from 62.4% down to 61.9% as the perhaps underweight EUR investment saw appreciation to 20.5% from 20.3%.

In Brexit news, due to the holidays season and related UK government closure, there has been no fresh news  ahead of the postponed governmental vote of confidence in Prime Minister Theresa May’s  current Brexit deal, due later this month. The existing deal looks increasingly unlikely to be approved in its current form. Whilst it seems she is becoming reliant on the fact parliament could vote in its favor, purely on the fact that some deal is better than no deal, which could be dangerous territory for both the UK and the Pound.  Over the weekend UK International Trade Secretary Liam Fox was quoted in the Sunday Times, saying that if the deal fails to get through parliament it stands just a 50/50 chance of resulting in no deal, and as the EU’s Jean Claude Junker reiterated that concession would not be made for the UK, a greater weight of expectation falls on the PM in the coming week.

In this first week of 2019 the data calendar is relatively light with many national holidays in the first part of the week. Friday brings the all-important US employment data, with the Non-farm payroll data expected at around 180K now jobs, up from the 155K generated last month. The US unemployment rate is expected to remain consistent and 3.7% and US average earnings are expected to continue increasing at a slightly faster rate, up to 0.3% from 0.2% last week.

Quite significantly after the employment and earnings data we would hear from Fed Chair Powell at 3.15pm UK time Friday, 4 Jan 2019, where the market will await comment on the committee’s broader rate view as well as his immediate reaction to the days significant data.

From all of us at Kylin Prime Capital, we wish you a wonderful and prosperous 2019!