Market Commentary: Issues 2019
The comments below are an edited and abridged synopsis of an article Credit Market Bulletin
The global financial crisis is the top issue of 2019. Last year saw the bursting of a historic global bubble, and crisis dynamics commencing with the blow-up of ‘short vol’ strategies and attendant market instabilities. Crisis dynamics engulfed Argentina, Turkey, China and EMs. Receiving a transitory liquidity boost courtesy of the faltering periphery, speculative bubbles at core US securities markets succumbed to blow-off excess. Crisis dynamics finally engulfed a vulnerable core during 2018’s tumultuous fourth quarter.
As we begin a new year, rallying risk markets engender optimism. Especially with the Fed’s early winding down of rate normalization, the bull market could be resuscitated and extended. The US economy remains reasonably strong, while China’s slowdown is under control. A trade deal would reduce uncertainty, creating a positive boost for markets and economies. With markets stabilized, the EM boom can get back on track. As always, upside volatility reenergizes market bullishness.
Market structure will remain a key issue in 2019. Trend-following strategies will continue to stir volatility and instability. US securities markets rallied throughout the summer of 2018 in the face of a deteriorating fundamental backdrop. That rally, surely fueled by ETF flows and derivatives strategies, exacerbated fragilities. Speculative flows fueling the upside destabilization eventually reversed course—and market illiquidity soon followed. Yet short squeezes and the unwind of market hedges create the firepower for abrupt rallies and extreme shifts in market sentiment.
This comprehensive article goes on to debate market illiquidity; crisis dynamics; the king dollar; America’s serious fundamental issues; China’s serious fundamental issues; a crisis in 2019; bubbles, and in particular, the Chinese bubble; and the Fed and US debt. In conclusion, it discusses currency; commodities; market dislocation; the Trump administration; the Federal Reserve; US bubbles; China; central banks; the global bubble; Europe; Brexit; the fixed-income bubble; leverage speculation; and geopolitics.