Several key factors have driven the financial markets since the start of the year. These market moving pressure points have included; economic growth, monetary policy, trade tension and geopolitical risk. Therefore the market dynamic is influenced by a combination of these factors. Each one of these singular episodes can inject volatility into the market, thereby creating market tensions in the near term. As a consequence, market may come under pressure in 2019 however global expansion should smooth out sporadic trading pattern. This is typical market behaviour during the late-cycle trends which the CTA Multi Strategy FX program will aim to capture. From our view, the individual market pressure points are not capable of initiating a market sell off. However, as a combination they can highlight areas of market weakness. As we enter the second quarter of the year the strength behind macroeconomic fundamentals is supportive of risk assets.
From a global perspective economic growth remains above the trend, as the business cycle continues along its expansion phase. Additionally, a benefitting factor contributing towards global economic growth has been the relative performance of the US economy. The data supporting this market dynamic thereby points towards stronger performance for non-US assets. As a consequence, the scenario in the US appears to be heading for further rate hikes. The factors supporting this view are; strong economic growth, a tightening labour market, and an uptick in inflation. However, it will be the consistency behind the economic data which determines the frequency of rate increases. Despite the fact that the rate of increases will be unclear, the FED will continue on it tightening path. Global trade tensions will still create volatility in the markets, giving opportunities to our Multi Strategy FX program.
Are Equities Cooling?
Since the start of the year a strong rally in global equities has lifted stock market valuations. However these elevated levels appear to outweigh expectations on corporate earnings. As a consequence of these valuations the signs are pointing towards a stock market correction. The rate or timing of a downturn in equities cannot be determined, but the sentiment is present. Firstly, corporate profit margins are under increasing pressure from higher wages. However, businesses are less reluctant to raise prices to alleviate these pressures. Therefore with corporate profits looking more vulnerable market sentiment must acknowledge a possibility of potential slumps. Despite the softening in global trade tensions, the treat remains.
Key data indicators currently highlight a downturn in developed countries’ prospects. These sentiment surveys can be overstating in their predictions, but it is clear that growth is slowing. Emerging market economies are faring better than those of developed countries. However, on a global scale the financial perspective on equities is on the negative side. In Asia the Chinese government is attempting to safeguard against a slowing economy. This is achieved with plans to inject stimulus equivalent to nearly four percent of GDP. As a result, infrastructure, public spending and trade measures will receive a boost in 2019. Globally trading technical analysis displays a positive picture for most asset classes. The exceptions are some emerging market currencies. This scenario must be considered by our Multi Strategy FX program.