After 9 months of reveling in glory and positive accolades and personally taking credit for a rampant stock market, historically low unemployment and surging U.S. growth, U.S. President Donald Trump’s star suddenly lost its shine as U.S. stocks gave back most of their gains for the year in a volatile 4th quarter. A combination of rising U.S. interest rates, an unconventional foreign policy, a US/China trade war, Democrats seizing a majority in the House of Representatives, key personnel leaving senior posts in the White House and just plain old profit-taking led to a rise in uncertainty and volatility leading to the “worst ever” day for stocks on Christmas Eve. Only two days later, the Dow Jones Industrial Average had the largest points gain in history. U.S. stocks finished the year well off their highs, with many pundits suggesting that we are virtually in recession and several siding with Trump in saying that the Federal Reserve has lost its touch in managing U.S.monetary policy.
So, what can we expect in 2019? Leopards do not change their spots and so we can be sure to expect more of President Trump’s unique approach to politics, both domestically and overseas. If this leads to market uncertainty and volatility, then it can also lead to opportunity. We are well aware of Trump’s view on the Fed and now it would seem that the Fed is listening to the President and also keeping an eye on the markets- not just on data. Could this be good for markets? U.S. data is strong, notably employment and growth. Certain Dow Jones behemoths are paying dividends in excess of the current yields on 10-year U.S. Treasury Notes. If the Fed is less restrictive in its interest rate hiking schedule, I can see confidence returning to stock markets at least in the 1st quarter of 2019.
Oil has taken a massive hit since October, losing 40% of its value. A combination of oversupply, President Trump’s jawboning and political pressure on the Saudi regime since the death of Jamal Khashoggi have all led to a capitulation in the price of oil. Cheaper oil, while not so good for producers and exporters, can stimulate economies dependent on imports. The other factor about cheaper oil is that it will squeeze out unprofitable producers, leading to supply constraints and ultimately a rise in the price of oil. At $45 per barrel I believe oil is due to a bounce and longer term the risk/ reward favors a recovery in the oil price. From the chart below, it would appear that $45 is a fairly good support level.
From “Black” gold to the shiny variety, and it’s true that XAU/USD has had an excellent run for the last three months having traded quite rigidly in a $1180oz - $1240oz range. $1240 in my mind is the new support level. For trend followers and also for those who wish to diversify and place a portion of their portfolios in a “store of value” whilst markets remain volatile, I see gold holding above $1240oz. Physical demand for the precious metal will also help buoy the price in the first quarter.
In the UK, the Christmas break gave UK Prime Minister Theresa May a chance to take a headache pill, but unfortunately Brexit is a severe migraine and political infighting in her own party, not mention massive opposition in general from all parties as well as increased fatigue and distrust from the British public and businesses, as well as bleak forecast scenarios from the Bank of England, means that GBP/USD is probably going to suffer. When Theresa May won her vote of “No- Confidence” GBP/USD rallied to the 1.2680 area before being sold off. With the current weaker dollar, GBP/USD has climbed marginally above that level. The UK parliament returns from holiday on 7th January. A lack of Brexit consensus, politics and brutal rhetoric will undermine Prime Minister May, rock credibility in her Conservative Party and undermine confidence in the British Pound. I see GBP/USD lower in the first quarter of 2019 and will be selling levels above 1.2680.
