Uncertainties persist and central banks more dovish

The final month of 2018 was a turbulent one for markets, with investors looking to materially wind back risk. The result was that major equity markets suffered heavy losses, leaving many with the worst calendar year performance they had experienced since the global financial crisis.

In the US, the 6.5% decline in the S&P500 for the 12 months to 31 December 2018 was a relatively moderate sell off, compared to the 18.3% drop in Germany’s DAX, the 16.2% fall in Europe’s Euro Stoxx50 and the 12.5% decrease in the UK’s FTSE100 over the same period. The Australian S&P/ASX 200 was down 6.9% for the year, a relatively small fall by comparison.

December had begun well enough, with some apparent progress made between China and the United States on trade tensions as a result of meetings on the sidelines of the G20 gathering in Buenos Aires. However, this optimism quickly eroded as it became clear that there was no agreement reached, rather it was a matter of a delay to additional planned tariff measures for 90 days to ascertain if a more broad agreement could be reached.

In the UK, Prime Minister Theresa May faced a leadership challenge over her Brexit deal. This served only to add to global tensions, as did domestic events in the US. These included what would become the longest ever government shut down, President Trump’s publicly voiced dissatisfaction over the course of US monetary policy and a sell-off in out-of-favour technology stocks. The severity of the sell-off became so concerning that US Treasury Secretary Steven Mnuchin reportedly called the CEOs of the six largest US banks to underpin confidence in the economy and to confirm there was ample liquidity.

Global: Equity market performance
Equities are recovering from 2018’s second half sell-off


Source: IFM Investors, Macrobond

It wasn’t until the day after Christmas that markets turned, with investors clearly concluding some asset classes had been oversold. But while January then brought about a partial recovery in markets, uncertainty persists going forward.

Looking ahead, geopolitical concerns and anxiety as to the future prospects of the global economy will likely ebb and flow, ensuring a heightened degree of risk aversion prevails for some time to come yet.