Five things to watch in 2019
A new year means new markets. So what’s in store this year?
That said, I see very little value in trying to call 2019. As traders, when it comes to listening to the fundamentals, forward guidance or Donald Trump, it is clear that what is said now has a very limited shelf life.
What I will be focusing on is: which markets will have a reason to move; what is the bias (if any); and what can I do to position myself in the short term to make a profit with a reasonable amount of risk.
The main areas to focus on are as follows:
Trump and trade wars
Trade wars, if history is anything to go by, never work out well. The last one helped cause the Great Depression. This aside, at least the US president is the ‘king of dealmakers’ (in his own estimation at any rate). The bias is that a trade deal will be positive for stocks. Even with the recent Wall Street sell-off, it is clear that Trump wants the stock markets to keep going up. So even though there is talk of a bear market, there is still every reason to buy the dip depending on who you trust more: Trump or the Federal Reserve.
The Fed’s forward guidance has been clear: a possible three hikes in 2019. This has led to the US dollar being a buy against most other global currencies (the European Central Bank and Bank of England clearly are in no rush to raise rates as quickly, if at all, in the near term).
The problem is that Trump sees rates as the enemy (as traditionally higher rates are bad for stocks as people move out of risky investments into cash). With the huge amount of quantitative easing, however, this ‘fear’ has been lost. So now markets either go up on Trump beating the Fed or they go down on higher rates and the end of QE. With the arguments to both buy and sell, I will always take a very short-term view when trading indices, usually using one- to two-hour charts maximum.
The S&P 500 and the Nasdaq 100 are both extremely volatile and, although company earnings will play a key role in movement, it is still much more the case that the Fed and policy intervention will drive demand for stocks. It seems with or without QE it is safer to be backed by intervention than true innovation. Sad but true.
Brexit – deal or no deal?
Sterling is still likely to face risks to the downside owing to Brexit uncertainty.
The pound is a buy for me on short-term dips. I do have longer-term trades that I will continue to hold. These are mostly against the New Zealand and Australian dollars. These countries have not faced the full force of the global financial crisis (Australia has gone 27 years without recession), but nothing lasts forever. A lot of traders get caught up with the major FX pairs and the US dollar, but there are many other options out there.
I see no easy answers for what’s in store in the long term in terms of Brexit. I can’t see a second referendum happening. But I also find the prospect of a ‘no deal’ hard to believe, as do the markets, which is why sterling is low but still far from being destroyed. I think the most likely outcome is a deal, but with the promise of another 10 years of uncertainty as trade deals are negotiated amid more wrangling with the EU. It just won’t be as simple as leaving the EU. The markets will take this though, and I feel the pound is a buy in the short, medium and long term.
EU – what’s next after Brexit?
The EU has played hardball with the UK. It is trying to save face and also trying to avoid contagion. You can see the cracks already in Italy trying to renegotiate the budgets. There are issues in Germany with corporate scandals and its integration policy, and there is unrest in France with the ‘yellow vests’. In my opinion, years of poor policy choices are exposing the EU for what it is: an outdated failed experiment.
The euro has enjoyed growth after Trump, with global entities piling into the single currency for protection. This is now over. Mario Draghi’s playbook is the same old thing every time, effectively repeating that printing money can come back at any time and rates will stay ridiculously low for as long as it is needed. The problem with the EU is that it doesn’t want to change. It wants people to change, but the people have had enough.
This is why I see the euro as a sell against the US dollar and British pound. The Swiss franc as a safe haven option would also be an interesting one. The German and French stock indices will follow the US markets, but I feel that one more scandal or major push down and you will see much more offloading of EU stocks than US stocks.
Weak growth in China – the new norm
China is starting to feel the pinch. Let’s face it, the figures from China have always been too good. How long was the world going to buy into the fairy tale? With growth slowing and a huge amount of debt being issued it has to admit that it has finally been caught, just like every other global economy always eventually is at some stage.
China has fought to be the world’s second biggest economy for years. But it doesn’t want to be number one. Why? When you are at the top the only way is down. Getting to the top is easy, staying there is not.
What’s more, on top of the trade war, the risk of actual war is growing. China is maturing and has a real military presence and the US does not like this. And let’s face it, with Trump in the White House it’s impossible to rule anything out.
Any talk of real wars would finally send stocks down.
Something’s got to give
All in all, there is an opportunity to go long and go short on every market out there. There are still very few safe havens.
Something has to give. We have pushed too much money to the top 1% of the highest earners. There is only so far the statistics in the UK, EU and US can push the working and middle classes. The question is, what gives? Stocks seem to me to be the best pay day out there for the rich and for the governments. Engineer a crash and everyone cashes in and taxes are paid. Restart the machine, then carry on regardless.
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