First, I’ll take a break next week. We wish everyone a Merry Christmas and a Happy New Year. Second, the last full week of trading is ending badly, writes Bob Savage Friday.
Markets are spooked about the risk of a U.S. government shutdown, an FOMC policy mistake and at the slowing global economic picture – Larry Summers weighs in with his 2020 recession risk at over 50%.
Throw in the renewed U.S. cybercrime push back on China and you get more trade fears than truce hopes.
The exit trade for risk has brought more volatility and volume – Thursday was the third highest of the year – suggesting that this correction in the U.S. and bear market elsewhere has true believers.
Faith is a key part of the season and for enjoying stories with the suspension of disbelief essential. When you believe it’s even better. However, what you believe matters particularly in a market filled with volatility.
This is the problem of the moment as the current conditions suggest a 2.6% 4Q GDP but the outlook for 2019 is grim and the forward-looking data are weaker. Throw in the risk of inventory overhangs thanks to trade war hoarding and 1Q growth fears are significant in the U.S.
The conundrum of the present revolves around the unwinding of the Federal Reserve’s balance sheet and its shift in tools from forward guidance to the blunt axe of rate hikes.
The ability for the Powell Fed to shift away from “normalization” to “data dependent” means the forward view on rates is useless. The credibility of the central bank is at risk unless they can prove their economic forecasts are good and that the economy can withstand more hikes regardless of weaker inflation.
This is where oil plays a role – as it’s a double-edged sword for 2019 – helping consumers and companies on their energy costs but hurting the U.S. oil sector, hitting business investment and driving up spreads in high yield. The U.S. shift to energy independence makes this oil price collapse complicated.
Until we see more data, after Christmas and New Year’s, there is little reason to see hope for a significant bounce back in risk or in oil. Global growth and its connection to oil is not particularly a strong correlation, but it’s the one that investors have taken to believe in 2018 and it’s the barometer to watch until 2019.
Chances for a bounce back to $50 in WTI seem high but hard to see what headlines work. Overnight there was a host of news and not a stitch of it really mattered.
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