Without question, the macroeconomic and geopolitical backcloth right now is more perilous than it was 12 months ago, giving stock investors plenty of food for thought as we get set to ride into 2019.
The big issue dominating the news agenda in the UK is that of Brexit, and the omnipresence of the issue on the airwaves and in print is likely to persist for many weeks to come (or possibly months or years should late March’s European Union exit date be postponed).
Cheap money choked off?
For many investors, though, Brexit is a sideshow in comparison to some of the other issues facing financial markets in 2019 and beyond. Indeed, the possibility of further monetary policy tightening in the West arguably represents a bigger potential problem for share markets in the year ahead given the swingeing impact of such measures on global growth.
The Bank of England and the European Central Bank have been plugging the supply of cheap money over the past year or so through interest rate rises. The chance of additional hikes in 2019 is extremely unlikely, though, in my opinion given signs of slowing or insipid economic growth across the continent at the close of this year.
Conversely, the threat of more interest rate increases from the Federal Reserve is very real in the forthcoming period. Indeed, another hike could be in the offing at December’s meeting of the central bank, and latest comments from Fed chief Jerome Powell — that “interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy” — means that we should expect a flurry of additional rises in 2019.
Data surrounding the health of the US economy remains sound enough to suggest further increases from Powell’s crew are in the offing, with latest GDP numbers from the Commerce Department released last week confirming strong growth of 3.5% in the third quarter.
President Trump has repeatedly attacked the Fed’s plans as detrimental for American economic growth, a view shared by some analysts. But the impact is likely to be felt further afield as well, as more Fed tightening would support the dollar and put more stress on emerging economies.
Trade wars
China has been one of those so-called developing nations that has been ‘struggling’ in 2018. Its economy grew 6.5% in the three months to September, down from 6.7% in the prior quarter and the lowest rate of expansion since the global financial crisis of 2009.
The introduction of US tariffs on hundreds of millions of dollars worth of goods has not been the sole driver behind China’s slowdown, but it’s still had a painful effect. And there could be much more to come on that front. While President Trump has recently called for a tariff moratorium for 90 days while US and Chinese negotiators try to eke out a deal, President Xi has been silent on the matter since the G20 summit broke off last weekend.
Given the politically-charged and complex nature of the issue, I for one wouldn’t be surprised to see the rhetoric between Washington and Beijing turn bloody again before the tariff freeze expires early next year, a situation that could see a repeat of October’s sharp share market success sell-offs. So hold on: it could be a bumpy ride.
