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Everything you need to know about global markets in 2018
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Loading...And just like that, the year in which we learned to live with late night Twitter rants from a U.S. president, record-high stock prices and the bitcoin bubble comes to a close.
As we enter 2018, steadily rising assets and diminishing volatility have become the norm, global growth remains strong, and optimism prevails across asset classes. Yet now isn’t the time for complacency.
Between politics and popular trades losing luster, there are boundless risks to keep you on your toes for the next 12 months. Here are some of the most important market themes -- both reassuring and unsettling -- to get you started.
Cooling Credit Rally
Sure, cries of a junk bond Armageddon have proved premature, with both high-yield and investment-grade bonds handing investors returns for the year, but plenty of risks threaten the upside in 2018. The Federal Reserve is unwinding its balance sheet, the European Central Bank is slowing purchases and forecasts show inflation may finally rise.
Credit investors polled by Bank of America Merrill Lynch for a survey published in December named a bubble as the biggest risk to the asset class, followed by higher inflation and rising yields. Flows reflect some of that unease. Investors pulled money out of exchange-traded funds that track corporate credit for the first time in 14 months in December, data compiled by Bloomberg show.
Ageing business cycle
If the U.S. economy can keep chugging along through the first quarter of 2018, it will match the second-longest expansionary period in modern history, according to data compiled by the National Bureau of Economic Research andBloomberg Intelligence.
That’s helping to lift global economies, spurring optimism across markets. The Citigroup economic surprise index of major economies hovers just under its highest level since 2010 after a slew of data surpassed analyst expectations.
In the year ahead, investors will have to assess the sustainability of the cycle amid risks of financial overheating and corporate America's levered balance sheets.
Mind the Elections
Rising global growth, the Fed’s cautious approach to monetary tightening and a weaker dollar helped emerging-market currencies and stocks post their biggest returns in eight years in 2017. But it might not take much to knock that equilibrium, especially with Wall Street forecasting the biggest tightening of developed-world monetary policy in a decade.
Investors will also have to maneuver around elections in countries that make up more than 50 percent of a Bloomberg Barclays developing-nation local bond index. While votes in countries like Russia are predictable, tight contests are on the cards for fellow market heavyweights like Brazil and Mexico.
Euro Rally Lives
As the euro heads toward its best annual run against the dollar in 14 years, options markets that price probabilities on the world’s most traded currency pair point to the rally continuing in 2018. There’s a two-thirds probability that it appreciates as high as $1.229 by year end, while the odds that it rises to $1.256 are even.
Political Wildcards
The tax bill that’s been driving recent moves in the U.S. stock market is edging closer to the finish line. As politicians scramble to pass it before year end, spending bills, a budget deal, and wrangling over the debt ceiling also linger in the background.
While analysts at Goldman Sachs estimate the S&P 500 could fall to 2,450 if the tax bill doesn’t pass, buybacks and cash repatriation provide ammo for bulls.
Meanwhile, investors can add an Italian election to their list of risks, alongside Brexit and ongoing tensions on the Korean peninsula.
Volatility return
In 2017, investors were caught off guard by the near-complete absence of volatility. In 2018, they could get a wakeup call from price fluctuations roaring back to life.
Over $2 trillion in strategies are effectively reliant on market stability to generate returns, according to October estimates from Artemis Capital’sChristopher Cole. That raises the risk of outsize losses across stock and bond markets around the world if volatility finally returns.
Fed Fresh Faces
Jerome Powell won’t be the only new kid in class at the U.S. central bank next year. The “Big Three” (chair, vice chair and New York Fed president) will be completely different after Janet Yellen’s stint in charge ends in February and the head of the New York Fed retires in the middle of the year.
They’ll have to weigh a tight labor market and sound economic data against muted consumer prices. How will they react if inflation roars back to life? And what if it remains stubbornly weak?
Don't forget China
Two of the more remarkable moves in 2017 were soaring U.S. stocks and tumbling Chinese government bonds. While the S&P 500's valuation is endlessly analyzed, the outlook for the world's largest emerging debt market is far less understood.
Chinese bonds will come under pressure again in the first half of 2018 as the central bank tightens monetary policy and the government toughens financial regulations. The rise in yields will attract domestic and foreign investors in the second half.
Source: Bloomberg Pro Terminal
Jr Trader Alexander Kumanov
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