We know that nobody really KNOWS anything ..... but we want to know what they think they know .....

ref :- "Here's (Almost) everything Wall Street Expects in 2019" , Bloomberg Markets


ref :- "Volatility of 2018 leads to changeable outlook" , The Financial Times, Markets and Investing

Regulars will know that we always like to take a look at what the experts are forecasting for the year ahead. We often think that making prognostications of this type is a pretty thankless task , more of a marketing tool than an accurate measure of predictive ability. The desire to avoid making a very public hash of what one might think is coming our way means that often such pronouncements are vague and open to several interpretations, especially when it comes to the timing of events. But it's instructive to see the general direction of how traders are thinking and probably even more instructive to realise at some later date just wrong the general consensus can occasionally be (think US dollar). Anyway, we would point you towards this Bloomberg piece that offers a comprehensive compendium of views across different asset classes from a large number of institutions.

The Financial Times article is more of an examination of market-influencing factors than any kind of directional view (as of course, it would be). The reference to the volatility of 2018 takes us back a year ..... at that time most were suggesting that the twelve-month period to come would see a spike in volatility and much trickier conditions for investors. Of course, with a sharp (though brief) sell-off in February and the much more significant late-year blood-letting, they would argue that they were right. When we talk about forecasters having to be vague enough in their language to encompass a variety of time-scales and degrees of severity, this is an appropriate case in point. The February hiccup was in large part a reaction to GOOD news, not bad : strong growth and rises in labour costs leading to exaggerated fears of Fed action. Fairly quickly the US stock markets resumed their giddy ascent.

And yes, they were right in suggesting that a major downward revaluation of equity values was on the way -- but we had to wait 10 months for it. Take a more defensive position by all means, but asset managers who positioned themselves shy of stocks throughout the year might have faced some pretty awkward questions from investors.

Anyway, 2019 .... and the FT asks if the US bond market is too pessimistic? Yields have tumbled (and bond prices soared) as investors increasingly have taken the view that the US economy will slow as it enters a hangover period after Mr Trump's stimulus-induced highs. The 10yr Treasury yield is trading at just 2.66% this morning, squashed by weakening expectations of Fed tightening and a classic move out of equities into bonds. Remember, many respected judges thought that this was headed sharply higher : 3.50% .... 4.00% .... even 5.00%.

Mmm .... it's possible that some of those experts are wishing that they'd reined back some of their bolder calls (though they're generally not the type to be bothered either by self-doubt or by criticism). Even now, according to Bloomberg the average estimate on Wall St is for the 10yr yield to end 2019 at 3.44%. That suggests that on balance they believe that the pessimism about the economy is overdone .... and if US yields resume their upward climb, that will presumably have supportive knock-on effects for the Dollar (which most are calling lower over 2019) and be bad news for emerging markets. It's a reasonable enough call but bear in mind that the market sages have consistently been too bullish on yields (and too bearish on bond prices).

*** Since we're talking yields, many eyes will be focussed on the 2yr / 10yr US Treasury spread (last at just 16 basis points), and the prospect of it inverting (short-term yields rising above long-term yields). Even though there are specific factors and conditions at play that may have changed the dynamics behind this spread value, inversion has been a pretty (even if not absolute) indicator of approaching recession. You may think that this time would be different, and for the most sensible of reasons, but the real question will be how many people feel the same way as you do, and how many will draw the traditional conclusions ?

Also examined is what the end of the European Central Bank's Quantitative Easing programme will mean for Europe. Since the huge bond-buying process (about €2.6 trillion) was the main factor behind keeping yields in the Eurozone depressed, it would be logical to assume that the termination of such buying would presage rises in yields, right ? Well, logical yes .... but not necessarily so. Unlike the US Fed, the ECB will continue to re-invest the proceeds of maturing bonds on their books -- they are not interested at this stage in reducing their balance sheet. And many of the core eurozone nations, including the most significant one Germany, run tight balanced budgets and have neither the will or the necessity to continually issue new debt (again, unlike the situation in the States). And what's more, growth in the EU is already faltering and factors such as Brexit and Trade conflict can only make things worse. Those who had been waiting for the next stage of monetary policy normalisation after the end of QE -- a rise in interest rates zero and below -- may have a long wait.

In short, and if the US example is anything to go by, outside of a heavy-spending Italy, say .... you'd have to conclude that rises in Eurozone yields now that QE is over is anything but guaranteed.

And talking of short, there's more in the FT article about the chances of one more leg upward for US stocks, and whether US / China trade tension will induce Beijing to let the Yuan/Renmimbi slide despite the danger that capital outflows would pose for China . You'll have to access the article yourself for those .... on the first working day of the year, that's definitely enough from us.

Featured Posts
Recent Posts