The final quarter of 2018 has been dramatic for financial markets. Global stocks were severely hit by accelerating signs of economic slowdown, trade concerns, geopolitical risks, and the tightening of U.S. monetary policies. Volatility returned with steep moves to the downside. Selling the rallies became a profitable strategy as opposed to buying the dips which have been followed for several years. Global equities saw more than $12 trillion in value wiped out, making 2018 the worst year for equity investors since the 2008 global financial crisis, and has ended the U.S. longest bull market in history.
Global synchronized economic growth was the key theme in 2017. Year 2018 was the divergence between the U.S. and the rest of the world. In 2019 we are likely to converge again, but this time in a synchronized global slowdown. Many indicators have indicated a peak in the U.S. economic cycle, including most recent economic surveys, financial conditions, housing data, and the inversion of the U.S. Treasury yield curve. Adding on with trade risk, political risk, fading fiscal stimulus, and a tighter U.S. monetary policy; the economic outlook will look much more vulnerable in 2019.
It is becoming evident that the U.S. economy has reached an inflection point. This doesn’t necessarily mean we are immediately entering a recession but expect much slower growth than the 4.2% seen in the second quarter of 2018. In such an environment, investors need to be prepared for a more volatile year as markets adjust to the new reality.
In Foreign Exchange markets, the US Dollar was the second-best performing major currency in 2018 after the Yen. It rose more than 4% against its major peers and appreciated significantly against commodity and emerging markets currencies. However, there is a high probability for the USD rally to come to an end in 2019.
There were numerous factors that supported the Dollar in 2018. Robust economic expansions, fiscal stimulus, hawkish Federal Reserve, and fund repatriation by U.S. firms were key to the Dollar’s strength. Looking into 2019, none of these factors will remain in play. Instead, the widening U.S. twin deficits will become more of a concern that may lead the Greenback to give up all of its 2018 gains.
Brexit is fast approaching and will likely make most of the headlines in the first couple of weeks in 2019. Although Prime Minister Theresa May has finalized the Withdrawal Agreement in November 2018, but still it’s not a done deal yet. Sterling will face a tricky situation in the months ahead. While an orderly exit from the EU will be welcomed by markets and provide a boost to the Pound, a no deal scenario has multiple outcomes with a varying degree of impact on U.K. assets. Are we going to see a disorderly exit from the EU, an extension to the deadline, a general election, or no Brexit at all? With all these possible scenarios, expect to see large swings in Sterling until the Brexit clouds clear.
Investors need to keep an eye on Macro Economic data, U.S. politics, trade developments, and Brexit negotiations. These factors will help us determine trading strategy in Q1 2019.
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