Don’t expect the quality and success of any journey to stand on how it starts, this is a marathon not a sprint. Two clock paths that feed into a time series suffer clock reconvergence pessimism.

Perhaps in the new world of computer aided trading and thinking we all suffer from this bias. However, history is on the side of the optimists – there have only been 4 times since 1929 when the S&P500 fell in back-to-back years – and those were in recessions, the oil crisis and in wartime. The last time was 2000-2002. The history of trading markets over the last 40 years has been about convergence where global markets sprung up from the push for a global economy after the Pax Americana at the end of the cold war with the Soviet Union. The inclusion of China in the WTO in 2003 and the sprint of the emerging markets to catch up to the developing world brought 3 billion people out of poverty. The great recession gave pause to this movement and last year the Trump foreign policy and trade tariffs brought further doubts about how history plays out into 2019.

The first trading 3 days of 2019 proved more exciting than those of 2018 as the fear of a bear market requires more diligence than running with the bulls. We end the week with many rethinking their gloom with renewed talk of Goldilocks, where US growth is better, rates are not restrictive and global tensions ease. For those interested in history here is the January 7 Weekly Track from 2018 – outlooks and lookouts. For those looking for just how bad 2018 was, consider this chart from DB – the USD returns of all assets was the worst in history.

The rush to safe-havens in 2019 may be the logical consequence of 2018 but it surely is a risk for a reversal, as 2019 unfolds as the mirror image of 2018 – bears are in control, rallies are meant to be sold, good news is always countered by fear of policy mistakes.

There are three significant fears driving markets – 1) FOMC rate hikes, 2) China growth with or without US tariffs, 3) Global politics – whether it’s the US government shutdown or Brexit or rising populism in Europe or the key elections in the year ahead. The first week of the year brought hope that the first two drivers are going to be less scary – specifically because of Friday and the FOMC Chair Powell dovish comments – suggesting he would pause and if necessary ease or stop the QE unwind.

Also key was the China PBOC RRR cut of 1% where talk of officials pushing banks to lend to private enterprises drives hope for stabilization in the economy there. Finally the lessons of 2018 and fear about elections – with Macron and France being the poster child for relief. Many see the fear of politics as event risk specific rather than endemic to a new post convergence world. In fact, the bulls will argue that 2019 is about reconvergence, where value and growth plays in emerging markets lead to more global gains. The problems for emerging markets maybe about their own divergence as current accounts and currencies play out after 2018 pain from Brazil and South Africa to the more extreme stories of Argentina and Turkey. In between, India and Mexico look cheap.

The value of the USD has been linked to the expectations of its rate differentials into the next year with many expectations that this will narrow rather than widen driving up speculation for EM and EUR gains. Other factors are at play as well with growth, current account deficits, inflation and government stability all mattering and hurting the USD outlook. However, there are few alternatives to the USD with the EUR facing Brexit and budget and growth issues. This weekend, the German AfD threatens to put German exits to the EU at play. The deglobalization threats outside the US remain in play and will hinder the EUR.  The US dollar index is more in a range than a new trend. 

There are other things at play for 2019 beyond PPP, rate spreads, politics and trade. Those wrap around the flow of money - with the sentiment shifts from October to the present so dramatic its historic and stunning. Being able to reverse those into a meaningful new trend seems unlikely and unwise. The bears will remain in charge of the bigger equity pictures accordingly. The need for 1Q earnings to beat expectations, for 1Q growth to surprise to the upside and for central bankers to remain patient - all are key factors for trading all assets not just equities. 

Market Recap:  

Apple earnings warnings for quarter set into play a panic selling of tech shares to start 2019 that all reversed on a better than expected US jobs report, a dovish tilt to FOMC Powell and a Friday RRR cut of 1% from China’s PBOC. Markets saw great illiquidity and volatility mixed with a significant mood swing from bearish to bullish. The BoA equity market sentiment barometer is up over 6% on average when sentiment swings like this.

The news of the week focused on slightly better China services PMI and worse manufacturing, slightly worse EU composite PMI and a bigger than expected hit to US ISM but made up for by stronger US jobs.  The US government shutdown, the news of trade talks continuing with US team in Beijing in the week ahead and of North Korea rethinking their denuclearization all netted out.  

Equities:

The MSCI all-country World Index rose 1.51% to 459.94 on the week. The MSCI EM index rose 0.24% to 964.97 on the week. Europe led gains in a holiday shortened week while EM lagged.  

• US S&P500 rose 1.86% to 2,531.94 on the week– up 3.43% on Friday, while the DJIA rose 1.6% to 23.433.16 on the week and the NASDAQ 2.3% to 6,738.86 on the week. The Cboe VIX fell 24.56% or 7pp to 21.38% on the week, with high Wednesday at 27.55%.  The US market year-to-date winner goes to the Russell 2000 up 2.38% to 1380.70.
• The Stoxx Europe 600 rose 2.13% to 343.38 on the week, up 1.7% on the New Year.  The German DAX rose 1.98% to 10,767.69 on the week. The French CAC40 rose 1.25% to 5,737.12 on the week. The UK FTSE rose 1.54% to 6,837.42 on the week and the Italian FTSE MIB rose 2.77% to 18,831.79 on the week. 
• The MSCI Asia Pacific Index fell 0.27% to 145.64 on the week. The Japan Nikkei fell 3% to 19,561.96 on the holiday-shortened week. The Hong Kong Hang Seng rose 0.48% to 25,626.03 on the week. The China Shanghai Composite rose 0.84% to 2,514.87 on the week. The India CNX Nifty fell 1.22% to 10,727.35 on the week. The Australian ASX all-Ords fell 0.68% to 5,677.0 on the week. The Korea Kospi fell 1.51% to 2,010.25 on the week. 

Fixed Income:

Holiday thinned markets left few believing the extreme moves in bond markets last week. The shove to 2.50% in US 10-year being an example of the panic. The China RRR cut by 1% was along with Powell’s patience comment the driving force for keeping rates lower along with the negative equity sentiment. 

• US Bonds rally with curve flatter after Powell Patience comment- for the week - 2Y off 4bps to 2.50%, 3Y off 4bps to 2.48%, 5Y off 7bps to 2.50%, 10Y off 7bps to 2.67% and 30Y off 6bps to 2.98%.  
• Canadian 10-year bond yields fell 3bps to 1.93% on the week– tracking US with C$ and Oil helping.
• Japan JGB yields fell 5bps to -0.04% on the week– shortened week with equities the driver – waiting for BOJ and watching 0% pivot.
• Australian 10-year bond yields flat at 2.32% on the week with big swings tracking China and US stories.
• UK Gilt yields flat at 1.28% on the week– waiting for Brexit clarity – tracking US and EU moves.
• German Bund yields fell 4bps to 0.21% on the week– smashed to 0.15% again in extreme risk-off panic but yields normalize with US.
• French OAT yields up 1bps to 0.72% on the week– with cost of Macron and yellow vest crisis in doubt.
• Italy BTP yields rose 14bps to 2.89% on the week– with growth and bank shares driving pain trade.
• Spanish Bono yields rose 6bps to 1.48% on the week – with elections looming and rest of periphery doubts.
• Portugal bond yields up 9bps to 1.81% on the week– tracking Italy again.
• Greek 10-year bond yields up 2bps to 4.40% on the week– holiday market. 

Foreign Exchange:

The US dollar index fell 0.2% to 96.20 on the week. The big story for FX was in the “JPY flash crash” Wednesday and the snap-back – that brought the US index to 95.83 lows and 96.93 highs. For the week in EM USD mostly lower- EMEA: RUB up 2.5% to 67.648, ZAR up 3.2% to 13.955, TRY off 1.1% to 5.33; ASIA: CNY up 0.25% to 6.864, INR up 0.55% to 69.54, KRW flat at 1115.85; LATAM: BRL up 4% to 3.715, MXN up 1.2% to 19.42, ARS up 0.9% to 37.34.

• EUR: 1.1395 off 0.4% on the week with 1.13-1.15 holding pattern and focus on safe-havens and growth – still ECB vs. FOMC.
• JPY: 108.50 off 1.6% on the week with 104.70 lows on flash crash washing 105 barrier but bounce notable and 110 back in play- EUR/JPY 122.95 off 2.6% on the week. 
• GBP: 1.2725 up 0.15% on the week with 1.26-1.28 consolidation around Brexit still – EUR/GBP .8935 off 0.8% on the week with .90 resistance. 
• CHF: .9865 up 0.2% on the week with .97-1.00 range watch – safe-haven focus with JPY – EUR/CHF 1.1215 off 0.35% with 1.1050 risks.
• AUD: .7110 up 1% on the week with USD weakness and China hopes driving but crosses mixed - .70 pivotal support again. NZD .6730 up 0.25% on the week. 
• CAD: 1.3375 off 1.95% on the week– better data, better oil, lower US rates and crosses with 1.3350 pivot again 1.36 capping. 

Commodities:

The S&P/GSCI total return index rose 2.63% to 2,277.50 on the week. Oil up, NatGas down led the week with mild weather one factor, risk sentiment and growth hopes the other. 

• Oil: $47.96 up 5.8% on the week (Feb futures) – with $45 now back as key base – equities/growth/OPEC cuts driving. Brent up 7.24% to $57.06 (Mar futures).  Focus is on $58 and $60 resistance again. 
• Gold: $1285.80 up 0.25% on the week (Feb futures) – but suffered big reversal Friday with $1300 back as cap and $1268 key support again. Silver $15.786 up 2.2% on the week with $15.50 base (Mar futures). 
• Corn $383.00 up 2% on the week. Better weather, better trade hopes. Soybeans $921.40 up 2.9%. Spring Wheat $570.20 up 3.6% on the week. 
• Copper:  $2.6535 off 2.9%.March Futures $2.6475 off 1.25% on the week. Watching equities and China. Iron Ore Feb $70.61 up 1.45% on the week gains all on Friday post RRR cut. 

Calendar for the Week Ahead: 

Busy week for Fed speakers and with Bank of Canada rate decision and Poland rate decision. How the US/China trade talks play out and how the US data from factory orders, new home sales, weekly jobs and CPI all hit matter. The focus on bond sales will be important given the extent of the moves in the last 2 weeks. Also the EU economic sentiment and German retail sales and factory orders. Global trade data for November will also be watched for signals on exports and ongoing views about trade issues in 1Q.

Monday, January 7:German and US factory orders, German and EU retail sales, Japan services PMI, US services ISM, US/China trade talks.

• 0430 pm Australia Dec AIG manufacturing PMI 51.3p 57e
• 0730 pm Japan Dec Nikkei services PMI 52.3p 52.5e
• 0200 am German Nov retail sales (m/m) -0.3%p +0.3%e (y/y) 5%p -0.7%e
• 0200 am German Nov factory orders (m/m) +0.3%p -0.4%e
• 0330 am German Dec construction PMI 51.3p 54.3e
• 0400 am China Dec FX reserves $3.06trn p $3.07trn e
• 0500 am Eurozone Nov retail sales (m/m) 0.3%p 0.1%e (y/y) 1.7%p 1.9%e
• 1000 am Canada Dec Ivey PMI 57.2p 58.1e
• 1000 am US Nov factory orders (m/m) -2.1%p +0.3%e /ex trans 0.3%p 0.1%e
• 1000 am US Dec services ISM 60.7p 59.1e
• 1130 am US sells $39bn in 13-week bills, $36bn in 26-week bills
• 1240 pm Atlanta Fed Bostic speech

Tuesday, January 8: Australia, France, Canada and US trade, German IP, EU economic sentiment, US JOLTS

• 0730 pm Australia Nov trade surplus  A$2.316bn p A$2.16bn e 
• 1045 pm Japan 10Y JGB sale 
• 1200 am Japan Dec consumer confidence 42.9p 42.0e
• 0200 am German Nov industrial production (m/m) -0.5%p +0.3%e
• 0245 am French Nov trade deficit E4.1bn p E6.0bn e / C/A deficit E0.7bn p E1.4bn e
• 0500 am Eurozone Dec economic sentiment 109.5p 108.4e / business confidence 1.09p 0.99e / consumer confidence -3.9p -6.2e
• 0545 am UK 10Y Gilt sale
• 0830 am Canada Nov trade deficit C$1.17bn p C$2.05bn e 
• 0830 am US Nov trade deficit $55bn p $53bn e
• 1000 am US Nov JOLTS job openings 7.079mn p 7.1mn e
• 0100 pm US Treasury sells 3Y $38bn notes
• 0300 pm US Nov consumer credit $25.38bn p $18bn e
• 0430 pm US weekly API oil inventories -4.5mb p

Wednesday, January 9: German trade, EU unemployment, Fed speeches, FOMC minutes, Bank of Canada rate decision, Polish rate decision.

• 0530pm Australia Dec AIG services PMI 55.1p 55.0e
• 0600 pm Korea Dec unemployment 3.8%p 3.9%e
• 0700 pm Japan Nov average cash earnings (y/y) 1.5%p 1.3%e
• 0730 pm Australia Nov building permits (m/m) -1.5%p -2%e
• 0200 am German Nov trade surplus E18.3bn p E19.5bn e / exports 0.7%p -0.5%e / C/A E15.9bn p E25.5bn e
• 0245 am French Dec consumer confidence 92p 90e
• 0400 am Italy Nov unemployment 10.6%p 10.1%e
• 0500 am Eurozone Nov unemployment 8.1%p 8.1%e
• 0530 am Spain Dec business confidence -0.2p +0.5e
• 0540 am German 10Y Bund sale
• 0800 am Poland interest rate decision – no change from 1.5% expected
• 0815 am Canada Dec housing starts 215.9k p 204k e
• 0820 am Atlanta Fed Bostic speech
• 0900 am Chicago Fed Evans speech
• 1000 am Bank of Canada rate decision – no change from 1.75% expected. 
• 1030 am US weekly EIA oil inventories 0.007mb p 
• 1100 am BOC news conference
• 1130 am Boston Fed Rosengren speech
• 0100 pm US 10Y note $24bn sale
• 0200 pm US FOMC minutes

Thursday, January 10: China CPI/PPI, US new home sales, Fed speeches. 

• 0730 pm Australia Dec NAB business confidence 3p 2e 
• 0830 pm China Dec CPI (m/m) -0.3%p 0.3%e (y/y) 2.2%p 2.1%e
• 0830 pm China Dec PPI (y/y) 2.7%p 1.6%e
• 1045 pm Japan 30Y JGB sale
• 1200 am Japan Nov LEI 99.6p 99.5e / coincident 104.9p 103e
• 0330 am Sweden Nov industrial production (m/m) 2.8%p -1.1%e (y/y) 4.6%p 3.7%e
• 0400 am Italy Nov retail sales (m/m) 0.1%p 0.2%e (y/y) 1.5%p 2.0%e
• 0500 am France 10Y OAT sale
• 0830 am Canada Nov new home prices 
• 0830 am US weekly jobless claims 231k p 225k e
• 0835 am Richmond Fed Barkin speech
• 1000 am US Nov new home sales (m/m) -8.9%p +2.9%e / 0.554mn p 0.569mn e
• 1000 am US Nov construction spending -0.1%p 0.2%e
• 1230 pm St. Louis Fed Bullard speech
• 1245 pm FOMC Chair Powell speech
• 0100 pm US 30Y bond $16bn sale
• 0100 pm Chicago Fed Evans speech
• 0700 pm FOMC Vice Chair Clarida speech

Friday, January 11: Australia retail sales, UK IP, GDP, US CPI

• 0630 pm Japan Nov household spending (y/y) -0.3%p +0.2%e
• 0650 pm Japan Nov C/A Y1309.9bn p Y1384bn e
• 0730 pm Australia Nov retail sales (m/m) 0.3%p 0.4%e
• 1200 am Japan Dec Ecowatchers survey 51p 49.1e
• 0320 am ECB Mersch speech
• 0400 am China Dec vehicle sales 
• 0400 am Italy Nov industrial production (m/m) 0.1%p -0.3%e
• 0430 am UK Nov industrial production (m/m) -0.6%p +0.2%e / manufacturing -0.9%p 0.4%e
• 0430 am UK Nov construction output (y/y) 3.8%p 2.5%e
• 0430 am UK Nov trade deficit G3.3bn p G2.2bn e
• 0430 am UK Nov GDP 0.1%p 0.1%e
• 0545 am Italy 3 and 7Y BTP sale
• 0830 am US Dec CPI (m/m) 0.2%p 0.2%e (y/y) 2.2%p 1.9%e / core 2.2%p 2.2%e
• 1200 pm US WASDE report
• 0200 pm US Dec budget statement

Conclusions:

The pain of 2018 will hamper the pace of any recovery in 2019. 

Banks maybe the key for understanding the EUR and the growth outlooks.

The risk and rewards from 2018 hang over 2019 outlooks. They aren't going to just go away despite the Friday price action and hope. The need for real progress is clear on trade, on political solutions, on growth and on understanding the central bankers reactions functions to financial conditions.Talk needs to be backed up with actions.