Issue13-strategynotes

2018 WAS A YEAR TO FORGET…

NBKCapital latestNews, Strategy Note

Kuwait: December 23, 2018

The year 2018 would probably prove to be the year where politicians and geopolitics played a bigger role in determining market conditions than any other economic or fundamental variable in recent history.

HIGHLIGHTS

  • The market rout intensified into the year-end sending major US Indices into correction territory. From their peak, the S&P 500 and the Dow Industrial Average are down 17.5% and 16.3%, while the tech heavy Nasdaq Composite is 22% in the red.
  • Oil is still in free fall and is now down more than 37% from a high of $86/bbl in October. This is despite the OPEC+ agreement to cut output yet again after a few months of expanding production. Main culprits are a weakening global demand outlook and an expanding US production.
  • Treasury yields seem to be starting to trend back down while the US yield curve is flattening which is intensifying concerns about an upcoming US slowdown and perhaps an outright recession.
  • Financial conditions in the US are tightening. Corporate spreads in both the HY and IG space are trending up, market volatility is back and this time its seems that it’s back to stay.
  • Despite a rate increase in December, the fourth this year, the Federal Reserve has toned down its language significantly along with its economic outlook. Markets are becoming increasingly convinced that there are only 2-3 hikes remaining in the current tightening cycle.
  • Growth in the global economy is projected to continue to grow albeit at a slower rate. Trade tensions, however, if not resolved, will have a taxing effect on the global economy. Export based economies such a China and Japan will be especially vulnerable, but the ripple effects would be spreading to a much wider circle.

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