Global financial markets closed the last trading month of 2018 on a mixed note. While we had sustained weakness across US asset classes, G6 currencies and commodities turned in a stronger performance against the US dollar amid lower trading volumes in the holiday season.
But perhaps the biggest eye opener in December has been the underperforming US equity segment. The S&P500 stock index closed the year following three successive quarters of gains in 2018. The reversal to close the year 7 per cent lower after gaining almost 9 per cent through the first nine months of 2018 was a historic first.
Similarly the Dow Jones 30 index reversed from being up 7 per cent in October to more than 5 per cent down on the year. It has been a month of wild swings in US stock markets due to lower holiday volumes and January will be pivotal in paving the way for the first quarter.
Following the split in the US Congress in November’s critical vote, we noted it would be a testing time for US asset classes and there is little to change this view as we turn our attention to the month ahead. Typically, January is seen as the hangover month - following a typically strong holiday period for retail sales.
We will turn our attention to the second week of January when corporate earnings season kicks off on January 14. Better than expected earnings could provide short-term relief rallies, but overall I maintain my bearish bias in US equities through the first quarter of 2019. Relief rallies in the interim could be boosted by favourable developments in the ongoing US-Sino trade war story.
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In November during the G20 Summit in Buenos Aires, there was an agreement to suspend the hike in US tariffs on Chinese goods from 10 per cent to 25 per cent on January 1. In recent days President Donald Trump tweeted on the optimism of the progression of trade talks with his Chinese counterpart. This theme should develop more through the middle of the first quarter, but again watch for intraday opportunities on the back of this developing theme.
The US dollar index turned in a relatively low-key December, ending 1 per cent lower following an impressive overall showing in 2018. Outperforming most major currencies, the dollar is still well positioned against its G6 counterparts. I have continuously stated that amid the current Fed rate hiking cycle, the dollar would continue to be well bought - and Commodity Futures Trading Commission data shows that the number of dollar long positions have grown to the highest levels since May 2017.
While I expect to see a push towards the 97 channel through March 2019, the recent Federal Open Market Committee projections for 2019 will dampen some of the bullish dollar optimism. Future rate hike projections were slashed in December’s meeting - and with the European Central Bank possibly in a position to look at rates themselves in the summer, we could be beginning to see this more than year-long dollar rally begin to dampen.
Also, keep an eye out for Brexit developments as the March 29 deadline looms closer and Parliament returns from their Christmas recess on January 7. MPs were set to vote on Prime Minister Theresa May’s Brexit deal back in December before the Prime Minister famously pulled the vote at the last hour.
With the debates set to restart again following this recess, markets could have a vote result in the second week of January. Volatility will remain high in the British pound, and with not much changing since December Mrs May faces a tough uphill battle to get a deal delivered. Considering this, another test of those sub 1.25 levels in GBP/USD could be on the cards in the month ahead.
Gaurav Kashyap is a market strategist at Equiti Global Markets. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti