Top Trade Idea 2019: 2019 Looks Like A ’Risk Off’ Year, Monetary Response Likely Key

December 31, 2018

Top Trade Idea 2019: 2019 Looks Like A ’Risk Off’ Year, Monetary Response Likely Key

As we peer at it from the end of 2018, the coming year looks like a straight ‘risk off’ trade. Uncertainties proliferate to an almost unbelievable extent. The numbers tell us most key regions are slowing. Even the previously punchy US is not immune, as the latest underwhelming employment numbers showed.

Add in trade tensions, oh, and political problems of all stripes in Europe. This does not look like a time for heroics, does it? Global stocks look very hard to recommend now, as do growth-linked currencies such as the New Zealand and Australian Dollars. The Japanese Yen by contrast would undoubtedly be much weaker were the world deemed a safer place. It’s haven status may buy it some reprieve from worries about a domestic monetary policy which looks increasingly unlikely to succeed. The Euro and Sterling seem likely to struggle for some time to come too. Brexit, Italy’s budget, civil unrest. Well, take your pick.

Much in the markets will as ever depend on the world’s monetary response. If as is now suspected the Federal Reserve takes its foot off the rate-rise pedal, we may yet see a return of animal spirits which could see risk assets gain once more.

However, to make any gains stick a durable trade settlement between the US and China will probably be necessary too. And don’t forget that low interest rates stoke borrowing, whatever else they achieve. Debt levels are already high around the world. One area which may yet benefit is the Emerging Markets. They were hit in 2018 by the prospect of much higher US rates, and waning Dollar liquidity. If the rate hike cycle is now felt to be near a peak, their pain might just be lessened.

The Australian and New Zealand Dollar’s dramatic October break of downtrends which had previously endured all year took me very much by surprise. After all the dominant feature of this market- interest-rate differentials had hardly changed. The US Dollarremains more attractive than either on simple comparisons and, with the Reserve Banks of neither Australia or New Zealand thought likely to raise base rates from record lows in 2019, will probably remain so even if US rates rise by less than the markets had thought. The lesson here is that market focus can switch on a dime to other matters, in this case a revival of overall risk appetite, even if the dominant driving factor remains in place.

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