Bedrock’s Newsletter for Friday 11th of January, 2019
11 January 2019




 Friday, 11th of January 2019

It is the first Newsletter of the year and first, we would like to wish all our readers a very happy, healthy and successful new year!


Finally, the day after Christmas, Santa woke up and brought this long-awaited respite in the brutal correction that happened during the bigger part of December. To put that in context, US equities had their worst December since 1931! It was a bloodbath and no sector or risky asset was spared. Oil had its biggest losing streak in 10 years, and the Japanese currency even had a mini flash crash, losing about 4% in a few minutes, before recovering. In 2018, all Equity indices finished in the red, with one notable exception (Brazil). The MSCI World AC, lost 9%, while the MSCI EM lost 14.50%. and of course, Europe itself was the hardest hit with the DAX losing more than 18%!


However, since 26th of December, all markets have rallied and are up already more than 10% off the lows, while oil is up by more than 23% since the lows of December. These are truly exceptional moves, as we had the biggest swing in points on record for the Dow Jones, as well as the biggest jump in points ever, in the last days of December. Then, last Friday, we had evidence that the descent in December was more a market event than a fundamental event, with the release of the Blowout Jobs number in the US, which came in at double the expectation! This allayed fears that economic growth in the US was coming to an end. Stocks rallied powerfully, and then Powell added some more fuel to the rally, by stating that the Fed was no longer on a pre-course to raising interest rates and that the future looked less clear cut regarding their policy. The Fed Minutes communiqué stated that “With an increase in the target range at this meeting, the federal funds rate would be at or close to the lower end of the range of estimates of the longer-run neutral interest rate, and participants expressed that recent developments, including the volatility in financial markets and the increased concerns about global growth, made the appropriate extent and timing of future policy firming less clear than earlier”. This statement contributed to make the Nasdaq finish the day up nearly 5%, another very rare occurrence. Since then, and now a whole week after, equities around the world have continued to rally every day this week.


The one place where equities had a good year was Brazil. The Bovespa started to stabilize after the summer on hopes that Bolsonaro would be elected and would be much more market friendly. He ended up with a convincing election victory and his choice of Paulo Guedes as new finance minister was widely applauded by the financial community. The Bovespa continued to go up, as did the Brazilian currency, and we strongly believe in the change that is coming. It is a fundamental change of paradigm, which should turn the situation in Brazil from its lousy state of the past few years. Things won’t happen in a few weeks, but let’s not forget that the Trump election also unleashed a big economic and financial change that led US equities to rally for 2 years before seeing its first meaningful correction.  As of yesterday, and only after 7 trading days since the presidential inauguration, the Bovespa hit a new record high and it is already up 6.7% year to date.


Next week is earnings season again and this could be the most interesting quarter in a long time. It could be a period when the stock market is put to the test, as companies discuss trade, slowing global growth and other issues that have shaken investor confidence. There have been some high-profile warnings, such as Apple, Constellation, FedEx and Lennar. Analysts expect that most of the bad news is out on earnings, but if the results and comments are worse than expected, the market could easily retest its lows. On the other hand, if earnings are better than expected, they could act as a positive force to help fend off further declines, strategists said.


We also agree with the opinion of JP Morgan’s Jamie Dimon. He said that “Markets from equities to high-yield bonds that have been flashing warning signs are probably an overreaction to slowing growth rather than a precursor of imminent recession.” Dimon added in a Fox Business interview released on Tuesday “I think markets are overreacting to short-term sentiment around a whole bunch of complex issues”. He quickly added that the market moves were a “rational response” to slower growth and the U.S.-China trade dispute. But overall, Dimon, who leads the biggest U.S. lender, said the December stock declines and the halting by banks of high-yield debt issuance last month were unwarranted. He said he’s “really not worried about” what happened to riskier corporate debt because credit spreads are returning to normal after a long period of suppression.


Demon was not alone holding that view. Ben Bernanke, the Fed Chairman who oversaw the worst crisis in 2008, said that “I don’t think this is way out of the range of relatively normal behaviour — we have uncertainty about trade, we’ve got uncertainty about the global economy, we’ve got uncertainty about the near-term path of the U.S. economy,” Bernanke said Saturday during a panel discussion with former Treasury Secretaries Henry Paulson and Timothy Geithner. “Markets absorb that uncertainty and reflect that” and he added that “Having our experience 10 years ago, we’re certainly not seeing those kinds of risks”.


To be fair, the world is still a complicated place. Trade tensions between US and China are still ongoing and not resolved, China has seen its economic growth slow quite a bit in the past few weeks and months. In Europe, the Brexit saga continues and is starting to have a biting effect on the UK economy, while France is overwhelmed with the “gilets jaunes” protests. This is certainly going to have a negative impact on the economic numbers and on GDP growth there.


So, we will probably witness a slowdown in world GDP growth, but no recession for the months to come. The US engine is still very powerful, while EM countries are seeing their economies back in expansion mode. Even China should continue to add liquidity and reflate its economy and we expect it to come to an agreement with the US concerning tariffs.


Last but not least, Interest rates around the world will stay low for a very long time. In the US, long term rates at 2.7% are not a problem. And in Europe, Switzerland and Japan, rates are low and negative and will stay there for a long time still.


In these times of heightened fear and market turbulence, it is always good to remember this quote from Warren Buffett “Be fearful when others are greedy and greedy only when others are fearful.”


We wish you a very nice weekend.



Market Weekly Highlights

Currencies & Commodities

  • The greenback finished 2018 stronger against most of the currencies, with the DXY 4% higher despite the trade war mixed signals, Fed rate increases and latest equity market correction. However, since January 1st, the DXY is down, trading at 95.00, influenced by Powell’s dovish view on rates for 2019.
  • The EURUSD pair is higher this week currently trading above 1.15 as the dollar is weak across the board.
  • The CHF is flat for the year against the USD, with the USDCHF pair trading at 0.9840 while being slightly down against the EUR with the EURCHF pair at 1.1330 this morning.
  • After finishing the year 5.5% down against the USD on the back of the Brexit and May saga, the Pound is a bit higher, currently at 1.2820. We believe it will remain volatile and under pressure not only because of the risk of a No-Deal Brexit, but also because of the worsening outlook for the British economy.
  • The USDJPY has had the most extreme move since the start of the year moving from 109.78 on the first day of the year to experience a flash crash and hit 104.87 the day after. Since then, it has traded back to 108. 20..
  • In EM, the Brazilian Real is stronger for the year so far, currently at 3.71 against the USD having started the year at 3.9. the Ruble stands at 67.00 and the TRY at 5.48.
  • Bitcoin is flat for 2019 after the 75% drop of last year, currently at around USD 3630.
  • Crude oil WTI, which had dropped massively during the last quarter of 2018 dropping by 40%, is showing positive performance this year trading up to 53$ (up 24% YTD); Brent is at around 61.88.

Fixed Income

  • 10Y U.S. Treasury yields remained below 3% since last October and hit 2.50% on the second day of trading of the year to stand currently at 2.70%.
  • The Japanese 10-year JGB yield is now at 0.017%.
  • In Europe, the German Bund yield has moved sideways since the first trading day at around 0.24%. Same for the French 10Y Yield which had crossed the 1% mark during February last year it has dropped since and has started the year flat at around 0.66%.
  • In Peripheral Europe, Italian 10Y yields are now trading at just above 2.5%, lower than the levels seen in May 2018 when the internal political turmoil kicked-off. The Spanish 10Y yields trade some 110 bps lower than Italy at 1.44%, almost where it started the year.


  • Markets in the US experienced a very volatile year putting them all in negative territory for 2018 and giving away more than 15% despite the unusual late Xmas rally which started right after Xmas Day. A rally which has continued since and has given another picture for 2019 for all the major markets, showing positive returns for 2019. SP500 and DJIA are up, respectively by 3.58% and 2.89% YTD, while Nasdaq is up 5.29%. The SP500 is currently at just above 2,590, the DJIA just a couple of points below 23,940, while Nasdaq is trading at roughly 6,980.
  • In Europe as well, markets are all showing positive returns for the year so far, with Italian MIB and Swiss SMI being the best performers at respectively 5.32% and 4.96%. The Eurostoxx50, Spanish IBEX 35, DAX and FTSE 100 are all following with gains of 2.45%, 4.10%, 3.37% and 3.53%.
  • In Asia, the Nikkei is also up this year and shows positive returns of 1.72%, as is Hang Seng up by 3.18%.
  • BOVESPA is the most positive equity market for the year showing a strong performance of +6.73% on strong hopes for the new Government policies.


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