Risk assets continued their climb higher in December

Risk assets continued their climb higher in December with most global equity indices posting around 1 to 3% gains to close the year on a strong footing.  Global Central Banks dovish stances in the face of a more stable economic outlook, ongoing FED balance sheet expansion (stealth QE) and corporate buybacks have fuelled the stock market rally despite an earnings slowdown.

Market sentiment indicators are suggesting that the year end chase for beta has taken us into ‘extreme greed’ or ‘euphoric’ territory which might be ominous for Q1 2020 performance.  With monetary policy having potentially reached it’s limits in many regions globally, there will be a push for more fiscal stimulus to keep the economic machine going and whether or not that gets delivered will have major implications for the inflation outlook and direction of bond yields and equity markets.

In FX land, the USD has experienced broad based weakness this month, softening around 2% against most majors as the FEDs monthly repo market liquidity injections show no signs of stopping.  This USD move has naturally lifted precious metal prices which after a month of consolidating have now resumed their rally with Gold up 4% and Silver up 6% in December.

Closer to home, the UK election result was a landslide for the Tories which resulted in a brief spike in GBPUSD to 1.35 but then it settled back to be inline with the other majors as Boris brought back the potential threat of ‘no-deal’ if a trade agreement was not reached by end of 2020.  We suspect GBP will be supported for the at least Q1 as the Brexit deal gets through parliament but then would expect further volatility over the course of the year.

Looking forward to 2020, the US election in November is the major event and this is being reflected in volatility markets which are pricing in a significant premium around that time.  The polls are showing an uptick in Bernie Sanders chances of getting the democratic nomination and this could send some shockwaves through the markets if it were to materialise.

It is also likely that Trump will re-ignite some Trade-war rhetoric to appear to be acting tough with China, most likely in the first half of the year.  This should give him plenty of time to walk it all back in time for the election and cause a stock market rally as we’ve seen multiple times this year.  Also the FED cutting rates should not be ruled out in response to any market turbulence despite what they say about there being a high bar for further monetary accommodation.  As we’ve seen on enough occasions, when the market puts a gun to Powell’s head, he does what they want.

Bottom Line:  The powers that be will most likely support markets enough to fuel further risk asset gains into next year’s US election and extend the cycle.  However, markets these days are very quick to reprice changes in the political landscape and so this could bring some bouts of volatility along the way (Brexit/Trade war/Bernie Sanders).  Buying dips in equities in H1 still makes sense (once sentiment normalises) and having a decent allocation in precious metals for the foreseeable future would be our main recommendation.