Bedrock’s Newsletter for Friday 18th of January, 2019
18 January 2019




 Friday, 18th of January 2019

We are now past mid-month, and what a month difference makes!

Exactly a month ago, equity markets around the world were in free fall, and with no end in sight. Panic was setting in, volatility hit multi year highs, and 90% of marketable assets went down in sync, a first in 100 years!

Fast forward to today, and all markets are in positive territory, and not by a little bit. Let’s look at world equity indices first. The MSCI World is close to +5% in the first 2 weeks of January, but some markets are posting much better performances. The Russell small cap index in the US is up 8.8%, Russia and Brazil are up 9% and Switzerland is up nearly 7%. Oil, which had a horrendous drop in December is now up 15%. Credit is also having a good start with High yield being up close to 3%.

We already wrote last week extensively on what had changed the mood (namely much better US employment figures than expected and a much more conciliatory Powell). This week, by the way, US economic figures continued to be better than expected with US jobless claims coming in lower than expected and the Philly Fed index coming at double what was expected. We should add some good corporate earnings coming out of the US, particularly from the big banks whose CEO’s said that what they saw in their respective businesses was nowhere near a recession.

China, which was a big part of the worries back in December with heightened concerns about the rate of their slowdown, just injected a record amount of money to stimulate its economy. On Wednesday, the Chinese central bank injected net 560 billion yuan ($83 billion) into the banking system, the highest ever recorded for a single day. After a string of headaches, some positive news appears to be also on the way for China’s economy. The growing likelihood of even a limited trade deal with the United States combined with a ramp-up in Chinese stimulus are jointly making some experts more optimistic about the 2019 prospects for the world’s second-largest economy. The escalating trade war was a dominant narrative in 2018 and seems to have hit both countries’ economies and financial markets, with China largely seen as having taken the bigger blow. The atmosphere, however, has changed after a 90-day truce began early in December. Negotiations in Beijing earlier this month were mutually hailed, and more talks are in store. Furthermore, the U.S. is reportedly even considering lifting tariffs to reach a deal. That is all helping create a positive atmosphere for some kind of agreement. “The point is that both sides are now under a lot of pressure to get a deal done,” Stefan Hofer, chief investment strategist at LGT Bank in Hong Kong, told reporters on Tuesday, calling it “just something that has to happen.” Although China’s economy is growing at a slower pace than before, its stock market has emerged as one of the best places in Asia to invest in, according to global investment house Fidelity International. Chinese stock valuations are looking “very, very attractive right now,” said Fidelity International’s investment director for Asian equities.

UBS and Goldman have also both come out with positive outlooks on equities for 2019. Tan Min Lan, head of the Asia Pacific investment office at UBS Global Wealth management told CNBC’s “Capital Connection” that “If you take into account corporate fundamentals, still positive growth rates and China policy easing that is ongoing, we do think that this year, equity markets will probably return between 12 to 15 percent in total returns”. Goldman, for its part, said that, if history is any guide, U.S. stocks could deliver big gains in 2019, and some companies have more potential to outperform than others.

The S&P 500 typically rebounds after declining 20 percent within a quarter, and historical precedents of policy concerns and late-cycle drawdowns show potential for major upside, strategists led by David Kostin wrote in a Jan. 11 note. The U.S. benchmark came to the brink of a bear market late December before ending 2018 down 6.2 percent after two years of gains.

On this side of the Atlantic, the big news of the week, or rather, the big no-surprise event was the rejection of British Prime Minister Theresa May’s deal on Brexit by parliament in the UK. The deal was rejected by 230 votes – the largest defeat for a sitting government in history and was followed the day after by a no confidence vote that she survived, also not unexpectedly. So, for now, no one knows what is her plan B, whether Brexit will occur and if a deal will happen before the expected March 29th deadline or if this deadline will be extended. In any case, we continue to believe that this whole mess is very detrimental both to the UK and to the EU economies. Also, Europe remains the dark spot on the world economic prospects. Add to this lower growth prospects in France due to the “gilets Jaunes” movements and the lower political clout of Merkel and Germany….

We leave you with this quote to ponder after such abrupt swings in the equity markets: “The desire to perform all the time is usually a barrier to performing over time.” – Robert Olstein




Market Weekly Highlights

Currencies & Commodities

  • The DXY is about flat year to date, after experiencing a little drop in the first 2 weeks, influenced by Powell’s dovish view on rates for 2019, but still buoyed by big interest differentials in favour of the Dollar.
  • The EURUSD pair is lower this week currently trading below 1.14 as the dollar strengthens across the board.
  • The CHF is now lower for the year against the USD, with the USDCHF pair trading at 0.9940 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 higher, currently at 1.2910, on the last events of the No-Deal Brexit but also on the back of a rising risk of a snap election. We believe it will remain volatile and under pressure not only because of the political uncertainty due to the continuous Brexit saga, but also because of the worsening outlook for the British economy.
  • The USDJPY has strengthened and is now back at the top of the range at 109.60.
  • In EM, the Brazilian Real is stronger for the year so far, currently at 3.73 against the USD having started the year at 3.9. The Ruble stands at 66.44 and the TRY at 5.36.
  • Bitcoin is flat for 2019 after the 75% drop of last year, currently at around USD 3626.
  • 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 54$ (up more than 15% YTD); Brent is at around 61.56.

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 2.76%.
  • The Japanese 10-year JGB yield is now at 0.016%.
  • In Europe, the German Bund yield has moved sideways since the first trading day at around 0.27%. 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 2.7%, lower than the levels seen in May 2018 when the internal political turmoil kicked-off. The Spanish 10Y yields trade some 136 bps lower than Italy at 1.34%, lower then where it started the year.


  • Markets in the US experienced a very good rally since the beginning of 2019, after a horrendous end of 2018. SP500 and DJIA are up, respectively by 5.15% and 4.47% YTD, while Nasdaq is up 6.77%. The SP500 is currently at just above 2,630, the DJIA at around 24,370, while Nasdaq is trading at a couple of points above 7,080.
  • 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 7.22% and 6.53%. The Eurostoxx50, Spanish IBEX 35, DAX and FTSE 100 are all following with gains of 3.44%, 5.60%, 4.35% and 2.63%.
  • In Asia, the Nikkei is also up this year and shows a positive return of +3.25%, as is Hang Seng up by +4.82%. BOVESPA is the most positive equity market for the year showing a strong performance of +8.49% on strong hopes for the new Government policies.


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