E Markets: Faith

First, I will take a break next week. We wish everyone a Merry Christmas and a Happy New Year. Second, the last full week of trading is ending badly. Markets are spooked about the risk of a US government shutdown, an FOMC policy mistake and at the slowing global economic picture – Larry Summers weighs in with his 2020 recession risk at over 50%.  

Throw in the renewed US cyber crime push back on China and you get more trade fears than truce hopes. The exit trade for risk has brought more volatility and volume – yesterday was the 3rd highest of the year – suggesting that this correction in the US and bear market elsewhere has true believers. Faith is a key part of the season and for enjoying stories with the suspension of disbelief essential. When you believe its even better. However, what you believe matters particularly in a market filled with volatility. This is the problem of the moment as the current conditions suggest a 2.6% 4Q GDP but the outlook for 2019 is grim and the forward looking data are weaker. Throw in the risk of inventory overhangs thanks to trade war hoarding and 1Q growth fears are significant in the US.  

The conundrum of the present revolves around the unwinding of the US Federal Reserve’s balance sheet and its shift in tools from forward guidance to the blunt axe of rate hikes. The ability for the Powell Fed to shift away from “normalization” to “data dependent” means the forward view on rates is useless. The credibility of the central bank is at risk unless they can prove their economic forecasts are good and that the economy can withstand more hikes regardless of weaker inflation. This is where oil plays a role – as it’s a double-edged sword for 2019 – helping consumers and companies on their energy costs but hurting the US oil sector, hitting business investment and driving up spreads in high yield. The US shift to energy independence makes this oil price collapse complicated. Until we see more data, after Christmas and New Year’s, there is little reason to see hope for a significant bounce back in risk or in oil. Global growth and  its connection to oil is not particularly a strong correlation, but it’s the one that investors have taken to believe in 2018 and it’s the barometer to watch until 2019. Chances for a bounce back to $50 in WTI seem high but hard to see what headlines work. Overnight there was a host of news and not a stitch of it really mattered. 

Question for the Day:Is China going to ring in a Happy New Year? Rumors of a China tax cut helped inspire a modest bounce back in risk in Europe. The least reported story from overnight comes from the China Central Economic Work Conference. China will keep next year’s economic growth within “a reasonable range,” with the government maintaining a pro-active fiscal policy and the PBOC holding a prudent monetary policy. The government will strengthen counter-cyclical adjustments of macro-policies, and make policy fine-tuning in a pre-emptive way, Xinhua said. China will strive to support jobs, trade and investment and resolve financing difficulties for small and private firms, while curbing risks and financial market volatility, it said. Note that the statement doesn’t increase spending or cut rates. The markets risk larger disappointment next week should the meeting produce no clear new programs.  

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Thorgood 9 months ago Member's comment

The best thing that could happen is that JP gets off his high horse and admits he blew it, Oil and Trump's Folly (tariffs) for now seems to be doing his dirty work so there need not be any further rate increases for 2019. If anything they should be lowered. The economy is very fragile.