There has been a considerable market reaction to the G20 meeting at the weekend and this week the attention switches to growth indicators, the US labor market and the OPEC meeting. We consider the outlook for forex, equities and commodities.
The dollar strength that has been such a key factor for major markets throughout 2018, may not have too much left in the tank. The three pillars of dollar strength have been the US/China trade dispute, US economic outperformance and the path of Fed monetary tightening. Nearing the end of 2018, these factors are looking less decisive. The G20 meeting showed that the US and China could now be on a path towards ending the trade dispute. If not reversing the tariffs, at least ensure that the dispute does not escalate further into all out trade war between the two great powerhouses of the global economy. The prospect that the US reached peak growth in Q3 is increasingly likely. With Q3 GDP sitting around 3.5%, the Atlanta Fed’s GDPNow sees the economy tracking around a percent lower in Q4, whilst as the impacts of Trump’s tax reform drop out, growth in 2019 could be around 1% to 2%. Whether the US economic outperformance continues in this apparent slowdown is yet to be seen. However, we also now have the Fed getting jittery too. An erstwhile hawkish Fed chair Powell has now suggested that Fed Funds rate well above 3% is less likely now. This makes another four rate hikes from the 3.00% to 3.25% current range, possible but if so is likely to be the limit. Furthermore, if the FOMC is more “data dependent” then in the midst of 2019 global economic slowdown there will be plenty of excuse to under shoot these hikes. Treasury yields could now struggle for upside traction, as will the dollar. 2019 could be a year of consolidation at best for the greenback.
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