For much of 2018, predicting each day's events in the financial markets has felt impossible, as major geopolitical developments such as the U.S.-China trade war, Brexit talks, the U.S. Federal Reserve press conferences, NAFTA talks, OPEC meetings, and even mere tweets by U.S. President Donald Trump caused the markets to wobble. While it's hard to make decisive financial markets forecasts, there are a few trends that hold clues to what we can expect in 2019.
1. The China-U.S. trade war
For much of the year 2018 the raging trade war between China and the U.S. has caused the dollar to rally against its rivals as the U.S. continued to impose hefty tariffs on Chinese imported goods.
The trade war is currently undergoing a 90-day truce, ending sometime in March 2019, which has done nothing to alleviate China's deteriorating A-shares market. Looking at China's current declining numbers on fixed asset investments, a retreating industrial production and a slowing growth in the property market, China could be paying the heaviest toll in an escalating trade war scenario in 2019.
2. The Brexit Headache
When it comes to the overall U.K. economy, it all boils down to how fast and effectively the Bank of England will be able to react to any Brexit outcome after March 29. The worst-case Brexit scenario is that Britain crashes out of the E.U. with no deal and with insufficient preparation.
In such a case, the Bank of England could hike rates sharply to shore up the pound and hold inflation down. Under the Bank's model for a no-deal Brexit, the base rate can jump to 5.5%. If no-deal is mitigated by a transition arrangement, the base rate is anticipated to hit 1.75%. For the sterling this could mean two extremely different outcomes, if the Bank of England choses to hike rates sharply to hold inflation down, the sterling will soar. On the flipside, if the Bank slices rates as it did after the Brexit vote in 2016, this would in turn cause the GBP to tumble against its rivals.
How the U.K. fares beyond March 29 is the big question. A less favorable deal could limit U.K.'s access to EU financial services markets and cause a short-term depreciation of the sterling. We will likely to see more bear trends for U.K. high street stocks. Retail shares like Debenhams are already at all time lows so we could even witness sell-offs, merges, takeovers and even bankruptcies when it comes to retail shares. A digital services tax could save the ailing U.K. high street but that won't happen until 2020.
3. E.U. Members Struggle with More Budget Deficits
Since taking power in June 2018, Italy's populist government has given rise to torturous negotiations, and major internal tensions that put pressure on the Euro. On December 20, 2018 however, Italy's leaders bowed to the demands of the E.U. and reached an all-important budget deal with the European Commission, sending the EURUSD more than 1 percent higher on the day.
Looking into 2019, it is important to keep in mind that Italy is not the only E.U. member faced with budget deficit challenges. France, for example, could struggle to finance itself after President Emmanuel Macron gave in to anti-government street protests by yellow vest citizens struggling to make ends meet, while in Poland a defiant nationalist government may soon have to face serious E.U. lawsuits.
Besides that, the political landscape in Germany could reshape the entire European political scene completely. When Angela Merkel leaves, we could see serious trouble come out of Germany, which is also bound to put more pressure on the Euro.
All in all, 2019 is going to be a challenging year for the E.U. and its single currency.
4. More Trends
Among other major 2019 scenarios, there is a possibility of an emerging market crisis, possible instabilities in the global political scene, and a tighter than expected the U.S. Federal Reserve monetary policy.
Overall, 2019 will bring many decisive developments in the broader geopolitical sphere and a lot of opportunities for vigilant investors.