Markets must brace for more volatility in 2019 across the globe
Same themes that dominated 2018 will emerge again next year
The last meaningful week of the trading year saw the same old themes continue to play out as equities headed lower on the back of trade concerns, interest rate uncertainty, and geopolitical tensions. Oil continues to be unimpressed by the Opec deal of a fortnight ago, while the dollar was afflicted by the renewed threat of a US government shutdown. What we learnt in the last week of the year was that none of the issues that have dogged markets in 2018 are likely to go away fast in 2019.
The main event of the week was the decision by the US Federal Reserve Open Market Committee to raise interest rates. The FOMC voted unanimously to raise interest rates by 25 basis points on Thursday as expected, taking the fed funds band to 2.25-2.5 per cent. However, the Fed cut its growth and inflation forecasts and lowered the dot plot to imply two hikes in 2019 instead of three. The new median projection puts the fed funds rate at 2.9 per cent by end of 2019 and 3.1 per cent by end of 2020, down from 3.1 per cent and 3.4 per cent in the September projections. At the same time the median estimate of the neutral rate was also lowered to 2.8 per cent, from 3 per cent. The statement said there was still a need for "some further gradual increases in the target range for the federal funds rate," although the addition of the word "some" tempered the impact slightly. The FOMC also said that the balance of risks is "roughly balanced" and it "will continue to monitor global economic and financial developments and assess their implications for the economic outlook", signalling greater data dependence going forward.
On the whole the Fed’s actions fell a little short of the "dovish" hike that was expected by the markets, with the FOMC shrugging off recent market turmoil and appearing intent on continuing the tightening process. So monetary policy will remain a source of uncertainty next year, with the US dollar’s reaction, first higher and then lower, illustrative of the low level of confidence that exists about where things will go from here. On top of this was added the renewed threat of a government shutdown after President Donald Trump refused to sign a Senate spending bill aimed at averting one. And with the year ending with more turmoil in the White House, with Defence Secretary James Mattis retiring, it is hard to believe that the political environment is going to become any less volatile – more likely quite the reverse.
At least China appears to be somewhat aware of the risks, certainly to its own economy, with top policymakers there saying that "significant" cuts to taxes and fees will be enacted in 2019, while also signalling an easier monetary policy stance. Facing renewed pressures over trade, the priority of the Chinese government appears to be much more clearly about boosting demand rather than dealing with its long-term structural problems.
From a regional perspective, Saudi Arabia also signalled that boosting demand is the way for the GCC to move forward in 2019, releasing an expansionary budget by pledging to raise spending by 7 per cent to try and encourage growth in the non-oil economy. Total spending is expected to hit 1.1 trillion riyals ($295 billion). The government also announced it would maintain its cost-of-living allowance for public sector workers of around $266 per month. Saudi Arabia does not publish a fiscal breakeven price for its oil exports but other estimates for next year which include similar sized increases in government spending imply an oil price of around $80 per barrel in order for the kingdom to record a neutral fiscal balance. With oil prices again falling sharply and given an increasingly poor outlook for next year, it is likely that Saudi Arabia will again need to turn heavily to debt markets to finance any shortfall, with other regional economies likely to do the same.
This year is ending with many of its pivotal issues, both globally and regionally unresolved. Brexit and European populism are also themes that look set to continue well into next year, and of course there will be new threats, issues and opportunities that will emerge as the year evolves many of them overlapping. Taken together 2019 already looks likely to be a particularly challenging year.
Tim Fox is Chief Economist & Head of Research at Emirates NBD.
Updated: December 23, 2018 06:46 PM