Higher Volatility and Slower Growth Emerge in 2019

2019 started off where 2018 left off providing traders with volatility. The smooth movements of riskier assets that stocks, commodities and currencies experienced in 2017 were replaced with whipsaw price action in 2018. It appears to be continuing in 2019. Oil prices are attempting to rebound as it appears that OPEC is unhappy with below $50 oil. The dollar has come under pressure now that it appears that the Federal Reserve will only tighten interest rates once at the most in 2019. Brexit has come back into view which could generate volatility for the pound and FTSE and Chinese growth continues to slow as the US and China continue to search for a trade deal.

Volatility Remains Elevated

Despite a rally in global equities during the first 2-weeks of 2019, volatility remain elevated. The VIX volatility index is firmly entrenched above 19, which is above the 200-day moving average at 16.5. This reflects an underlying upward bias to implied volatility.

Oil Prices are On the Mend

Oil prices have trended higher in 2019 after getting hammered in late 2018. Prices have found support following comments from Saudi Arabia that they would reduced exports in January and February following their agreement in November to cut output by 1.2-million barrels per day. The decline in OPEC output could be offset by additional production from the US which is currently producing 11.7-million barrels of crude oil per day.

The Dollar Has Eased

In December the Federal Reserve increased interest rates by 25-basis points and said rates would continue to rise during 2019. The markets did not take kindly to this news and tumbled. Fed Chair Jerome Powell walked back these comments in early 2019, and eventually the dollar eased and riskier assets stabilized. US yields started to decline and dropped to a point where there is no additional Fed increases priced into the market in 2019. The decline in US yields weighed on the dollar and now the focus turns to the ECB.

Chinese Growth is Softer than Expected

The US – Sino trade negotiations and tariffs have put pressure on the Chinese economy. GDP has eased and the Chinese trade surplus widened showing the future growth is slowing. The trade surplus expanded to 57 billion from 41.8 billion in November. Chinese exports dropped by 4.4% compared to expectations that they would increase by 2%. Imports dropped by 7.6% compared to expectations that they would rise by 4.5%. Exports to the United States dropped by nearly 4% in December compared to a 10% increase in November.

What Trends are Likely to Continue

The days of smooth volatility are likely in the rear-view mirror. A Brexit deal between the EU and UK is unlikely which comes at a difficult time for the ECB and BoE. Inflation could begin to percolate but these central banks could be hamstrung due to the lack of a trade agreement. The US and China will could put forward a trade deal which will lift riskier assets. Oil inventories could decline which can put a floor under gold prices.