Now that the Mueller investigation is out of the way in the US, the political focus will begin to focus on the 2020 Presidential election. The race for the White House is a long process, and the next election is likely to be even more contentious than the contest in 2016, if that is possible.
Meanwhile, markets have been displaying an increasing level of concern since the most recent meeting of the Federal Reserve. The US central bank told markets that rates will not rise in 2019 and to expect only one 25 basis point increase in the Fed Funds rate in 2020. The FOMC cut three rate increases from the agenda compared to their guidance at the end of 2018.
Meanwhile, the Fed also told the markets that they will end their program of balance sheet normalization this coming September. The central bank cited weakening economic data over recent weeks and months and they reduced their projection for US GDP growth to 2.1 percent.
In the aftermath of the Fed meeting, there was an inversion of the yield curve meaning that some rates that are closer to maturity are higher than deferred rates. The inversion has historically been a harbinger of recessionary pressures which is the reason why stocks have had a bumpy ride over the recent sessions. Meanwhile, two factors could cause the rollercoaster ride in the stock market to continue after the dramatic recovery in share price that began in late December.
The first issue facing markets is the ongoing saga of trade between the US and China. Negotiators in Beijing and Washington DC are hard at work trying to develop a framework that Presidents Trump and Xi can sign to end the period of protectionist trade policies between the nations. Markets will react to the ups and downs of comments from each side until an agreement is in place which will add to volatility.
The other issue is the UK’s exit from the European Union. On Wednesday, Prime Minister Theresa May offered to resign as the leader of the UK if the Parliament would vote in favor of her proposal which is acceptable to the leadership of the EU. The Prime Minister may be grasping at straws in an attempt to deliver a deal that would fulfill the wishes of the citizens of her nation after the June 2016 referendum. The March 29 deadline has already been pushed into June, but without an approval by the Parliament, a hard Brexit could be the only result, which both sides in the divorce are attempting to avoid. The pound versus dollar relationship has favored the pound since the end of 2018 as the market appears to be betting that a solution to Brexit is on the horizon and the issue will be settled by the end of June.
As the weekly chart shows, the pound has appreciated from under $1.25 against the dollar at the end of 2018 to the $1.33 level as of the close of business on March 27.
Trade with China and Brexit could be the two most significant issues facing the global markets over the coming weeks. Until each is settled, we are likely to see lots of price variance in markets across all asset classes.