What Awaits Us in the Financial Markets in 2019

2018 was a weak stock market year — and what will follow in 2019?

The US becomes a brake pad: in the past, the US was the global economic powerhouse. This year, on the other hand, President Trump’s “America First” policy has increased momentum in the United States but has also weakened the global economy and contributed to a challenging environment for the capital markets. For 2019, however, a trend reversal is emerging. The easing effects of fiscal easing, higher interest rates, and punitive tariffs are likely to lead to a significant slowdown in growth in the US. This will allow the Federal Reserve to end its monetary tightening or at least take a break.

The US dollar is likely to weaken significantly over the course of the year. On the other hand, combined with the recent sharp fall in oil prices and macroeconomic easing in China, the environment for the global economy may brighten. In particular, emerging market assets are likely to benefit from these developments, but gold could also start a new uptrend.

Developments on the global capital markets were disappointing this year. The stock markets have lost most of their value since the beginning of the year and the Asian and European indices, in particular, are clearly in the red. The bond markets also showed a majority of losses as a result of the higher key interest rates by the US Federal Reserve.

These developments are surprising at first glance. The global economy started the new year with good momentum, with US President Donald Trump’s additional fiscal stimulus boosting the domestic economy and boosting US corporate earnings growth through lower corporate taxes. However, unlike earlier economic cycles, the US has not proven to be a global economic engine. On the contrary, the America First policy has meant that the strength of the US economy has been a major cause of the global slowdown. As a result of the high level of growth, the Federal Reserve has continued to tighten its monetary policy in the form of higher key interest rates and a balance sheet reduction.

Double pressure on the stock markets

Such a more restrictive monetary policy has historically been associated with a more difficult environment for emerging economies, as they often have debts in US dollars. In addition, President Trump implemented his trade policy agenda in the spring. This has led to a weakening of global trade with the introduction of punitive tariffs on aluminum and steel and the imposition of import duties on Chinese products. Lastly, Trump’s suspension of the Iran agreement spurred oil prices, which was often the prelude to weaker growth but rising inflation rates in the past.

Equity markets came under pressure from two angles: First, by reducing expected profits, as expected growth outside the US was lower. Second, through lower price-earnings ratios due to higher interest rates.

In the short term, this environment could continue with a stronger US dollar, higher interest rates in the dollar area and a difficult environment for risky assets. For the next year, however, a reversal of these trends is emerging.

Trump is likely to collapse against China

As a result, growth in the United States is likely to slow noticeably in the coming quarters. On the one hand, the positive effects of fiscal policy are slowly easing, on the other hand, the growth-slowing effects of the tighter monetary policy are likely to become stronger. In addition, trade disputes are increasingly becoming a burden for American companies as well. This slowdown in the economy should allow the Federal Reserve next year to end its monetary policy tightening or at least pause. This, in turn, should contribute to a significant weakening of the US dollar.

In addition, in view of the presidential elections in 2020, President Trump is unlikely to be in favor of a weak economy — and thus try to defuse the trade dispute with China by spring 2019 at the latest. As a result, the outlook for the global economy would brighten up. In any case, the sharp decline in oil prices since the beginning of October, with a usual delay of a few months, should support growth among major oil importers such as China, Japan, and the eurozone. In addition, China has moderately eased monetary policy in recent months to stabilize growth and is also taking measures to support growth through fiscal policy.

Emerging countries before the comeback

For the global risk markets, the environment should noticeably improve in 2019. In particular, emerging markets should benefit from a foreseeable end to the monetary tightening of the Fed and more favorable export conditions. Following the strong sell-off this year, corresponding assets appear attractively priced.

Political developments in Europe are likely to provide decisive impetus: early elections can not be ruled out either in Britain or Italy or in Germany. Although Italy will hardly solve its long-term growth problem, a new systemic crisis in the euro area seems less likely. A weaker US dollar should make the euro stronger in relative terms starting around the end of the first quarter but under pressure against the currencies of the more dynamically growing emerging markets. Last but not least, the precious metals should also be supported by these developments and gold is likely to start a new upward trend.

Author: Marko Vidrih

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