Review of the Year 2018
The 2017 rally accelerated into 2018 as the euphoria of the Trump tax cuts pushed markets to new highs. A sign of this was the fastest ever 1,000 point rise in the DJIA, eight days to Jan 17. There was a government shutdown, but this had no effect on negative markets. Notably FTSE fell sharply at the end of the month, as sterling reached a pre-Brexit high on the belief of a smooth exit.
The first sign of fixed income prices being significant came on Jan 9, when Japan announced a QE taper program, precipitating a sharp appreciation of the yen. US bond yields, after a fairly quiet 2017 started to rise, with the 10-year bond adding 29bp in the month. Added to an announcement of ECB tapering ending in September, and the GBP ramp, DXY had its worst month for over a year, and ended at a three year low. On Jan 25, President Trump called at Davos called for a stronger dollar (and ultimately got it, the end of the month marked the low point for USD). Also the first rumblings of the trade war started with the unveiling of tariffs on washing machines and solar panels. Sterling hit a post-Brexit vote high, buoyed by hopes of a ‘soft Brexit’ deal.
The other big news was the bursting of the Bitcoin bubble. From a high of $19,000 before Christmas, it ended the month at nearly half that price.
The tariff news had effect, and the month opened with the first crack in the Trump bull market when on Feb 2, despite an NFP beat and record post-2008 average hourly earnings, DJIA fell 2.55%, its worst day in percentage terms since 2008, followed by a 6% fall the following Monday, just as Janet Yellen was replaced by Jay Powell as Fed chair. The next tariff announcement was on steel and aluminum on Feb 16, and although markets recovered from the sharp drop, they were soon down again. The dollar’s fall was arrested and it ranged all month.
The month was all about tariffs as the first measures, 25% on imported steel and 10% aluminium were announced on Mar 9, followed by proposals of tariffs on $50Bn of Chinese imports later in the month. USD and equities continued to slide. The EU proposed retaliatory tariffs, but had its own local problems, when the populists won the Italian election on Mar 4, causing a sharp drop in the FTSE MIB index, although at this stage, bonds were not affected. Facebook stock dropped nearly 7% in one day on the Cambridge Analytica scandal, and the price fell further to close the month 13% down. The Fed hiked rates to 1.75%, but this was widely expected. Britain submitted its formal Article 50 withdrawal notice to the EU.
The trade war continued, with China confirming its retaliatory tariffs (on soybeans, cars, wine and pork) on Apr 2 and President Trump asking for more areas to be looked at three days later. On Apr 16, US companies were banned from selling to China’s ZTE and the SOXX index fell 5.27% in the next two sessions. The North and South Korean premiers met on Apr 27, and apparently made progress. But it was replaced by a new one, US bond yields hit 3% on Apr 24, for the first time since 2013, and this caused SPX to give up its gains for the month, unlike DAX and FTSE which were well up. The dollar broke out of its range to the upside, in line with the bond yields.
Concerns turned from the US to Europe this month, as the populist left-wing M5S and right-wing Lega parties formed a coalition. From the 7th to the end of the month, FTSE MIB fell 13% and BTP yields rose 136bp. This was against a background of a rising SPX (and USD) as the US put China tariffs on hold after a visit there by TreasSec Mnuchin and TradeSec Ross. The first signs of the EM currency crisis emerged as after a flat few months, ARS lost 20% against the dollar in the month.
Markets rose in early June, confounding the ‘sell in May’ theorists, but slowly gave up most of their gains after Chinese confirmation of retaliatory tariffs, and a Fed hike to 2% on Jun 13. An instant 1.47% on DXY on the day showed that the move was perhaps not fully priced in. SPX formed a perfect inverted-V for the month. Italian markets stabilised as the new government took office, although the German DAX considerably underperformed, on car tariff concerns as well as Italy.
The month opened with US and China reciprocal tariffs coming into effect, although this was largely priced in by the downward equities move in late June. On Jul 9, Turkey’s President Erdogan appointed his son-in-law as finance minister, and TRY investors ran scared. The currency dropped 3.8% that day. President Trump announced on 18th that the dollar was “too high”. This had less effect, DXY moved down about 1% but the effect was short-lived, as was the brief rally in CAD after the BoC rate hike on Jul 11.
The Turkish crisis became serious this month, with the currency in freefall. On Aug 13, USDTRY reached 7.08, which was a 44% move in two weeks, including a 15% fall in one day (Aug 10). The contagion spread to Italy (FTSE MIB down 8.87% for the month) and DAX (down 3.58%), compared to a 3.59% rise in SPX, after the Fed held rates, and AAPL became the first company to reach a $1 trillion valuation. Argentina was similarly extreme, with ARS losing 51.4% at one point to close the month 38.6% down after an emergency rate hike to an eye-watering 60%! None of this seemed to affect US equities or the dollar.
The disparity between US equity markets and the rest of the world continued in September as SPX made new highs, after the monthly unemployment figure came in (with NFP) at 3.7%, a 49-year low. (By a quirk NDX was slightly down having made a high on Aug 30, and a second high on Oct 1). Yet European and EM indices, being on the other side of the trade war, fell, despite an improved ECB inflation forecast on the 24th. TRY was stabilised with a huge rate hike to 24% on the 13th, as was Italy, in the absence of any further bad news. The USMCA (NAFTA 2) was signed. However, the Fed hiked rates again to 2.25% on Sep 26 (reversing a five-week USD decline), of which more later.
The month started with Italian problems again, as it was reported that the government were about to set an illegal (under EU rules) budget, and BTP yields shot up. This was followed a sharp rise in US yields (the 10-year stayed above 3% all month), and thus USD, which was already buoyed by the rate hike. Something had to give, and after a smooth rising summer, US equities finally collapsed. The big one-day drop was Oct 10 (SPX down 3.07%), but it continued all month, with the benchmark index posting its worst month for years. The Italian problem was relieved again at the end of the month by a better than expected S&P rating. It may have been pre-midterm election jitters but this was a clear move from stocks and bonds into cash.
Almost on a dime the US markets turned back up, and welcomed the mid-terms result as not as bad for the Republicans as maybe expected. The Fed held rates on Nov 8, but relief only lasted a few days, as SPX consolidated for a small monthly gain, although USD continued to rise smoothly. Meanwhile in Europe, the fade continued despite the EU/UK approval of a final Brexit deal, which did not help GBP at all. British MPs said they would not endorse it and sterling fell 1.67% in one day. The month closed with the G20 Summit in Argentina.
Another sharp turn in sentiment opened the month, as President Trump announced a 90-day tariff truce after the G20. The month end fell on a weekend, and SPX futures gapped up 1.66%, apparently the highest gap up in years if not ever. However, the moment was instantaneous, as the first yield inversion (three year bond yields higher than five year) happened a few days later and equity markets fell all month. Also, the Fed hiked rates on the 19th, with strong opposition from President Trump, and despite a Santa Rally after Christmas, the month finished as the worst December since 1931. The dollar was also down, despite a big fall in GBP as the British government could not get their Brexit deal passed.
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