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Timothy Fox - Head of Research & Chief Economist
Mohammed Al Tajir - Manager, FX Analytics and Product Development
Published Date: 13 January 2019
When Donald Trump tweeted on New Years’ day that Americans should ‘calm down and enjoy the ride’ investors might be have been forgiven for being alarmed about what might be in store for them in 2019, especially after another Fed interest rate hike and a series of bad economic news from China and the U.S. had left them reeling at the end of 2018. In actual fact, however, the first few trading days of the year have been quite different from what was immediately expected.
Stocks have rebounded, oil prices have risen and for the most part the dollar has declined as risk appetite has returned. In quick succession so far in 2019 there have been a number of positive factors that have helped propel markets higher at least in the first business week of the year. Trade tensions have seemingly eased, the Fed appears to be more responsive and sensitive to equity market falls, and idiosyncratic issues like Brexit have also ameliorated as it looks like it may not result in the UK’s abrupt exit from the EU.
Whether confidence on all these issues can be sustained, however, remains to be seen. The full details of the trade talks are still awaited, with the U.S. saying that they will decide on next steps after the official report has been discussed back in Washington. And in terms of U.S. monetary policy, markets will remain effectively in the dark about the state of the economy and the likely direction of interest rates until the government shutdown comes to an end. Finally the optimism that was seen last week might also be a source of its own undoing. While December’s market meltdown may have been responsible for Powell changing his tune on monetary policy, how long will it be before improving sentiment causes the Fed to start talking up interest rates once again?
Whether sterling can continue to draw support from a Brexit defeat for the May government also remains uncertain. While the vote on her Brexit plan will likely to lead to a significant loss on Tuesday, certainty that this will result in Brexit being delayed or even halted appears to be premature to say the least.
Source: Emirates NBD Research, Bloomberg
Economic Calendar for the week
Markets to focus on ECB policy meeting