December has so far been one of the worst year-ends for global investors in recent history. The S&P 500 has fallen 4.6 percent from the beginning of the month, and if it remains at current levels until year’s end it will mark the worst performing December since 2003. Neither the dovish statements we heard from the Federal Reserve’s policy makers nor the trade truce between U.S. President Donald Trump and his Chinese counterpart Xi Jinping provided signs of relief to the financial markets.
October’s sell-off was mainly attributed to fears of the Fed’s tightening policy. However, after Fed Chair Jerome Powell said rates are “just below” neutral, anxiety over higher interest rates is no longer justified.
This is occurring at a time when the global economy is experiencing a slowdown - and here comes the big threat. Bond markets have been more accurate than stock markets in predicting economic slowdowns. The short end of the U.S. Treasury yield curve already inverted last week and it looks like a matter of time before the long end of the curve inverts too. While this doesn’t necessarily indicate a recession is imminent, it’s a bold warning signal.
When looking at latest U.S. economic data, it doesn’t look bad. Despite the U.S. NFP missing market expectations coming in at 155,000, the unemployment rate remains at a nearly 50-year low. U.S. factory activity remains healthy according to the latest ISM figures, and similarly the service sector has reflected strong growth in November.
However, the U.S. economy won’t be able to sustain its growth levels when everywhere else is experiencing a slowdown, and the real test will be next year when Trump’s fiscal policy goes into reverse.
Equities in Asia resumed their sell-off from last week, while Europe, along with U.S. markets, are also set to open in the red according to futures.
This week is a big one for the UK with the European Court of Justice expected to rule on whether the UK can cancel Brexit unilaterally. UK Prime Minister Theresa May is expected to face defeat in a House of Commons vote on her Brexit deal on Tuesday. Today we will get to know whether May decides to delay the vote on her Brexit deal, but the biggest unknown is what happens if MPs vote down the deal. Are we going to see a second referendum, no-confidence vote, a hard Brexit, or even a general election? This will keep Sterling in a very volatile mode until the clouds clear.
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