Bedrock’s Newsletter for Friday 14th of December, 2018
14 December 2018




 Friday, 14th of December 2018

Friday again, inching closer to year-end and the close of what has been a rather strange year where much movement made little sense. Although the futures are indicating a lower opening for equities, we remain hopeful that Santa will be able to restart his engine and deliver traditional year-end rally (even a small one).


Either way, we will be looking shortly into fresh expectations for Q4 earnings’ reports which may re-ignite the old stock markets’ rally. But there is a head-wind rising as much talk of the global slowdown in economic growth is poisoning the fuel for a restart of the rally. But these bits of economic views may well be nothing but noise- the reality is that we are facing the end of an era- European Central Bank President Mario Draghi, speaking at the institution’s headquarters in Frankfurt following its latest monetary policy decision, announced a formal end to its massive quantitative easing program and held interest rates steady on Thursday, as was expected.  Other points of focus for investors include political uncertainty in the euro zone. Friction between Italy and the European Union over Rome’s 2019 fiscal plans have weighed on sentiment, while France’s government faces large protests. And in the UK, Theresa May won her party’s confidence, albeit by an uncomfortable margin, for another year. Back to Brussels she flew, hoping to negotiate some sweeteners. The Europeans are saying that there is nothing left to discuss, subject closed. Another wasted airfare?


Strange, we always believed that bears hibernate as the cold winter weather comes-in. This year, we are observing many bears running around and talking.


While black swans are impossible to predict, Nomura analysts have put nine “grey swans” for 2019 on their radar. The firm says so-called grey swans, close cousins of black swans, are foreseeable risk events that end up having a much more drastic impact than expected. A few of those in 2018 were the emerging markets currencies retreat, the volatility spike in February and the global equity sell-off. “None of these are our base case, and instead are more an exercise in forcing us to think outside our usual base scenario-risk modes of thinking,” said the team of currency, fixed income and economic analysts at the firm. The mini market quakes in 2018 — the emerging markets currencies collapse, trade wars, Brexit and U.S. stock correction — could be precursors for a big one in 2019, Nomura said. There are three possible market quakes, according to Nomura: a collapse in stock price, a contagious sovereign crisis in Europe and Chinese defaults. They cited U.S. stock valuations, Italian sovereign risk and China’s mountain of private debt as the catalysts. Oh, and Oil could well fall to $20 a barrel. “It’s easy to paint a picture of a market crisis in 2019, market liquidity conditions worsening with lingering effects of Fed hikes and continued balance reduction, the European Central Bank and Bank of Japan scaling back their quantitative easing measures and China continuing its deleveraging policies,” they added.


Then we heard Former Federal Reserve Chair Janet Yellen telling a New York audience she fears there could be another financial crisis because banking regulators have seen reductions in their authority to address panics and because of the current push to deregulate. “I think things have improved, but then I think there are gigantic holes in the system,” Yellen said Monday night in a discussion moderated by New York Times columnist Paul Krugman at CUNY. “The tools that are available to deal with emerging problems are not great in the United States.” Yellen cited leverage loans as an area of concern, something also mentioned by the current Fed leadership.


Then we read PNC Financial who had a message for investors: Buckle up. According to co-chief investment strategist Jeffrey Mills, 2019 will be another exercise in managing emotional responses to a scary market. “Volatility is going to be here to stay,” he said on CNBC’s “Futures Now.” “The path for the bulls is becoming a little bit narrower.” Mills, who believes the bull market is intact, cited skittishness surrounding tariffs between the United States and China and the Federal Reserve’s interest rate hike policy for the wild market swings. Even Goldman Sachs had a bear to display- Global equity markets could struggle to come to terms with a dramatic slowdown from the world’s largest economy next year, one Goldman Sachs strategist told CNBC on Monday, with trade tensions elevating the risk of near-term volatility. Fresh signs of slowing global growth, and emerging pockets of weakness in the U.S., rattled financial markets last week. And the sell-off continued Monday, with weaker-than-anticipated data from the U.S., China and Japan adding to mounting worries about the global economic outlook for 2019. “Next year is going to be tough because I think one of the key changes to this year is that the U.S. is going to slowdown,” Christian Mueller-Glissmann, senior multi-asset strategist at Goldman Sachs, told CNBC’s “Squawk Box Europe” on Monday.


Luckily there is the IMF, which expects US growth rates to indeed slow down some but remain positive at a 2% clip.  And Job growth slowed in November amid fears that economic growth is losing steam. Nonfarm payrolls increased by 155,000 for the month while the unemployment rate again held at 3.7%, its lowest since 1969, the Labour Department reported last Friday. Economists surveyed by Dow Jones had been expecting payroll growth of 198,000 and the jobless rate to hold steady. Average hourly earnings, a closely watched sign of whether inflation pressures are building, again rose at a 3.1% pace from a year ago. The monthly earnings gain of 0.2% fell short of estimates for a 0.3% increase. Is wage-driven inflation coming back? Not sure… A separate gauge that includes discouraged workers and those holding part-time jobs for economic reasons, sometimes called the real unemployment rate, rose from 7.4% to 7.6%. Next week we will have the truth. The Federal Reserve will tell us if they fear inflation and still think the economy needs “cooling” with the help of an interest rate hike. They truly have a problem- If they raise rates, they could exacerbate the markets’ malaise and hurt economic prospects. If they don’t raise rates, well, some will interpret this as confirmation of impending slowdown or worst yet, the Fed losing its independence, bending to the words of the Donald (who repeatedly said they shouldn’t raise rates). Damned if they do, damned if they don’t…


Well, the Dollar Index, DXY, has risen a little to 97.59, the high of the year. According to Morgan Stanley, the U.S. dollar will depreciate next year, and it’s not just because the Federal Reserve will potentially stop raising interest rates. They argue that if indeed the world will be slowing down, there will be less capital to buy US debt, just at a time when the Americans are running rising twin deficits… Morgan Stanley has predicted that the index will fall from its current level of about 97 to 85 by the fourth quarter of 2019, and 81 by the end of 2020, according to the bank’s latest Global FX Outlook report in November. Makes sense? Not really, as if the USA slows enough to cause such disruptions, imagine what will the rest-of-the-world feel? When “they” (that includes us all) hurt, they escape to the US$… That same scenario that scares a Morgan Stanley analyst away from the Dollar tell us that if he is right fundamentally, the US$ will rise, not fall…


We refrain from predicting anything quite yet, being in listening mode and will hopefully be more comfortable after the 19th, when the Fed’s words are read. The real big elephant in the room isn’t the Fed, it is global warming and its effects on humanity. But this issue is somewhat above our pay-grade to address…


“Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected”. George Soros




Market Weekly Highlights

Currencies & Commodities

  • The DXY is slightly up this week trading at 97.60, influenced by mixed signals on productive conversations between the US and China, as well as by the latest Fed Chairman’s comments on a “very strong” US labor market and a possible Fed rate pause.
  • The EURUSD pair is lower this week currently trading below 1.13 on the back of a gloomy note from an unexpected drop in euro-area economic activity and latest Draghi’s comments.
  • The CHF is weaker this week with the USDCHF pair trading just below parity, while the EURCHF is trading at 1.1250 this morning.
  • The Pound is down this week, currently at 1.2550 on the back of the Brexit and May saga. The Pound remains 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 seems to have hit resistance at 114, marking a pause in the latest two-week drop against the USD with the pair trading currently lower at 113.50.
  • In EM, both the Russian Ruble and Turkish lira are suffering amid US sanctions for the former and economic crisis and political turmoil for the latter. However, since mid-September the Russian Ruble has strengthened against the USD trading from 70 to 66.50, unchanged since the start of this month, as did the Turkish Lira which reached 7.23 in early August and is now at 5.41.
  • The Brazilian Real is unchanged this week, currently at 3.89 against the USD.
  • Bitcoin dropped heavily after breaking support at USD 6,400, losing almost 50% in one month and trading currently at around USD 3,270….
  • Crude oil WTI seems to have finally found a floor at the $50 level, it has stabilised in the past few weeks, and is currently at 52.50.

Fixed Income

  • 10Y U.S. Treasuries yields remained below 3% to stand currently at 2.90%.
  • The Japanese 10-year JGB yield has traded in a range from 0.020% to 0.060% for the first 6 months and then hit 0.16%. Now at 0.035%.
  • In Europe, the German Bund yield nearly doubled at one point this year, jumping from 0.40% to 0.80%, but then came back down as low as 0.20% in May on the back of Italian crisis fears. Now at 0.257%, after the latest GDP weak data. Same for the French 10Y Yield which had crossed the 1% mark during February and then dropped to 0.60% in the summer. Currently at 0.70%.
  • In Peripheral Europe, Italian 10Y yields are now trading at just above 2.56%, lower than the levels seen in May when the internal political turmoil kicked-off, but well above the 1.70% April levels. The Spanish 10Y yields trade some 116 bps lower than Italy at 1.40%, lower than where it started the year.


  • Markets in the US turned negative again for the Year 2018 except for NASDAQ which remains positive and posting +2.42% yearly return, giving away more than 12% from the highest levels reached this year. SP500 and DJIA are down, respectively by -0.86% and -0.49% YTD. The SP500 is currently at just above 2,650, the DJIA just a couple of points below 24,600, while Nasdaq is trading at roughly 7,070.
  • In Europe, markets are all showing important negative returns for the year so far, with DAX and Italian MIB being the largest underperformers at respectively -16.30% and -13.80%. The Eurostoxx50, Spanish IBEX 35, FTSE 100 and Swiss SMI are all following with losses of -12.06%, -13.78%, -7.75% and -7.30%.
  • In Asia, the Nikkei was down this week as is for the year marking -6.11%, while Hang Seng is down by 12.78%. BOVESPA is the most positive equity market for the year showing a strong performance of +14.97% helped by the election optimism.


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