Not what fund managers had hoped. Many of the most carefully laid investment plans this year have suddenly soured in the past two months. Seeing as it’s now a matter of days before year-end festivities and holidays kick in, chances of a meaningful recovery are few indeed. Scrooge’s Christmas.
No one specific thing can be blamed for the sell-off in so many asset classes. Think of it in terms of broad themes, like the fact outstanding debt has ballooned to a record high this year. That a lot of corporate debt has been used to buy back shares, making them terribly expensive relative to the company’s prospects. That the decade-long recovery since the 2008 great financial crash has seen only a few really improve their living standards; because of this many are resentful.
Those overseeing financial markets, whose mantra has been that things had got back to normal, are looking increasingly out of touch or plain wrong. If the Fed has been correct in raising interest rates, why is the US Treasury yield curve within a hair’s breadth of inverting? Central banks in many countries missed the signs in 2007, proved wrong when attempting to raise rates in 2010-11, and today most nations’ interest rates are still at rock bottom.
Four key charts again this week, with pointers for next year’s outlook. Central to a world staggering under a potentially unsustainable debt burden, benchmark US Treasury 10-year yields. This year they broke trend-line resistance and backed up to the highest rate since May 2011 – but briefly, they have retraced half the decline in their interest rates since 2007’s peak. The move since September looks increasingly like a false break and we expect a drop back down to 2.8 per cent by early January. A drop below the secular trend line since 1987 hints that the back-up since May was a false break.
The FTSE 100 is precariously perched at what had been resistance in previous years, so the jury’s out. The sell-off since August has been more dramatic than the halting rally since early 2017, reminding readers that bull and bear markets are asymmetrical; serious sellers take no prisoners. A monthly close clearly below 6800 tips the scales in the bear’s favour.
The European Commission may want to make the euro the global trade currency (and store of value); the Chinese yuan might pip them to the post simply by the sheer scale of its trade flows – which might encourage increased bilateral investment flows. But for now, the US dollar is still king. This year it has strengthened against all other currencies, especially some emerging market ones, but the move has reversed in part in the fourth quarter. Observed volatility has simultaneously dropped below 1 standard deviation of the secular mean, and volumes dried up in tandem. Currently trading halfway between its strongest and weakest since President Trump took office, we would allow for small, contained moves for another year or two.
US crude oil prices this quarter have slumped, from what must patently be a new unsustainable level around the $80 a barrel area. Oil majors will not like the news, but then again the downside is probably limited to the $40 area. Trapped in a tight range is good for global business.
