Before you all start thinking the title today is related to somekind of forecast of impending Armageddon; it’s certainly not,it’s more about how many market operators are already in the process of putting this year behind them and looking forward to how 2019 is going to play out.
For many that appears to herald an impending slow down in the US economic cycle next year; a lower dollar and an end to Brexit uncertainty.
However, I am not really sure its wise to draw too many conclusions on anything just yet. After all, there have been so many surprises already this year; that I think it might be premature to think that, with a little over one month to go; there isn’t still time for another.
In 2018 those surprises started with the outcome of the Italian elections, then there was the unabated and continued shift in US monetary policy and accompanying rebound in the dollar, the bear market for Chinese equities, and the failure of the UK to somehow, reach consensus on a Brexit policy.
Add to that the EM wobbles in Turkey and Argentina and you end up with quite a cocktail of unforeseen geopolitical and economic events, not to mention that the US/China trade dispute is seemingly no closer to a resolution.
Hence, personally speaking I don’t think many of these issues have necessarily reached their final conclusions although the Brexit saga is surely one that cannot run for much longer? Or can it? Well, as we all watch and wait on that, I will not focus on it here as I think we’ve all had our fill of it anyway quite honestly.
So, leaving aside all of what I have just mentioned, the other area of ongoing concern for me has been the pace of recovery in Europe which has simply not played out as many had expected earlier this year. Its simply not dynamic at all when one really digs into the numbers. Indeed, one can also look beyond Europe and see that global growth, outside of the US is stuttering too.
I think in part that’s also a reason for why oil prices have slumped most recently. Of course there are other technical dynamics at work there too, and the Chinese slow down in 2018 is surely an integral cause for the decline in Oil prices as well; remembering also that this latest move back to $50 a barrel has taken place against a backdrop of significantly deteriorating Mid East geopolitics.
Meantime, the US federal reserve has been unshaken in itsdetermination to normalize US monetary policy. Now, some people have mentioned to me that there’s more than just a hint of; ‘raising rates now so as to have something to cut later’ in that policy. Well, I am not so sure about that, but I do concede its not an entirely absurd assessment.
One thing is clear though, and that is the Fed has so far ignored anyone else’s agenda but their own. Perhaps another shock to the system this year and they might change that stance?
Well, in a little over 3 weeks from now we might find out when Fed makes their final policy decision of the year, where they are still expected to raise rates by another 25bp. That outcome is well and truly baked into the markets and with the dollar where it is right now, such an outcome will probably not push it any higher. Conversely, Fed in action next month will definitely push it sharply lower.
Beyond that, what else will really matter for the markets is what the Fed signals for next year. If that is for just 2 or less rate hikes in 2019, then the markets will probably let out a sigh of relief and the dollar will probably start to edge lower.
However, if the Fed plots a course for 2 or more and perhaps even as many as 4, then you can forget any notion of a Santa Claus rally in equities and a slow down in the dollar’s appreciation.
So as far as I am concerned and leaving aside any further geopolitical surprises- the latest news this morning surrounding Russia and
Ukraine for example- the monetary surprise to kick off the New Year will rest with the FOMC and just how resolute they are on policy tightening in2019. If they continue to stay with their predetermined guidance, then the end for 2018 will certainly not be ‘nigh’ for those in the markets that think it already is.
Key Data releases due this week
27/11- 11.00am UK CBI November reported sales
27/11- 3.00pm US November Consumer Confidence
28/11- 1.30pm US second read Q3 GDP
29/11- 1.30pm US core annualized October PCE
30/11- 1.00am China November Manufacturing PMI
30/11- 1.30pm Canada September and Q3 GDP reports