This is my last post for 2018 and I look forward to a 2019 that could prove one of the most interesting years in global markets since the global financial crisis as we look forward to having the following questions answered:
Are we headed into a global recession?
And just as importantly, what will the policy response look like the next time around? We suggest the next cycle of policy response will see central banks losing their independence as their reactions to the last crisis only dug a deeper hole and the answers to the world’s excess debt problems will have to be answer by government policy with central banks as auxiliaries to that policy.
When will the US dollar turn weaker?
The tight Fed and the liquidity absorption one-two of Trump’s fiscal blitz from tax reform and the Fed’s QT have dried up offshore USD liquidity – the key drivers of the US dollar’s 2018 resurgence – will the USD only weaken again when the Fed is forced to not only stop tightening but to reverse course?
Can China deal with its need to deleverage while maintaining relative yuan stability?
Certainly, less risk now for the Chinese economy if China chooses the weaker yuan path, given the massive sell-off in crude oil.
EU politics – spinning apart or pulling together?
The EU political situation and increasingly the financial situation in EU banks is in a bad place as we head into a pivotal 2019 for the EU. Possibly pivotal EU parliamentary elections are the first political litmus test in May. France and Italy’s budget situation will emerge again sooner or later next year and the EU political elite needs to wake up and get ahead of the curve by ending austerity and providing a roadmap towards greater mutualisation of debt, otherwise the countdown toward the next country to exit the EU – the euro currency area at least – begins.
A second referendum appearing more likely and supposedly favouring a Remain vote – but wouldn’t a narrow overturn of the original Brexit referendum then trigger civil strife across the UK? At worst, even if we are heading toward a “no deal” Brexit, a significant delay is likely first and sterling looks too cheap even if more two-way volatility awaits early next year.
I will discuss the above questions and more in our quarterly outlook available around mid-month in January. Until then, a very happy New Year and please stay safe out there!