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Here’s what investors are watching and discussing as a new trading week for markets beckons.
Central bank policy and asset prices at an inflection point?
This week, the Bank of Japan’s policy meeting will mark the last of what has been a very active month for central bank gatherings. With global equities on course for their best year since 2013, signs of window dressing abound, as investors chase strong performing sectors. Demand for US equities is picking up with the biggest weekly flows into large-caps since April and into value since March, according to Bank of America Merrill Lynch.
Some see the late-year rally in performance as further evidence of the “Fomo trade”, or fear of missing out, a classic late-cycle sign of investor exuberance that shows signs of rhyming with what we saw in Japan in 1989, the US in 1999 and China in 2007.
Once the calendar flips into 2018, and in contrast with the usual bullish analyst outlooks for next year, some investors starting with a clean slate may be less inclined to aggressively chase richly valued equities and bonds. Particularly as central banks are slowly moving towards the exit door of easy money. While inflation pressure remains subdued, stronger growth prospects — with US tax reform looming large — look increasingly at odds with loose financial conditions.
As fixed income analysts at Fidelity note: “Central bank policies are converging against the most synchronised (positive) global growth backdrop in decades.
As we shift gears towards tighter policy and leave behind 2017’s ‘goldilocks’ conditions, 2018 could prove a difficult year for investors.’’ Michael Mackenzie
One more dollar heave?
The last full trading week of the year threatens to distort investors’ longer-term reading of the dollar. End of term weariness has taken hold, says Bank of America Merrill Lynch’s Kamal Sharma, as shown following last week’s Federal Reserve rate rise, which did little to stimulate dollar buying. Instead, there is more attention on the direction of monetary policy in the European Central Bank.
The big market-moving event is, once again, US tax reform. A deal in principle has been agreed, but there is still room for mischief to scupper a vote and plenty of scepticism in the market about how much potency a final watered-down bill will retain.
The dollar should be helped by an end of year liquidity squeeze, as seen in the rising cost of swapping euros into dollars on a cross-currency basis. And the market has a large short dollar position, says BNP Paribas, increasing the prospect for a dollar rally.
But investors are more likely to let things lie until January. The broader view on the dollar depends on the speed at which other central banks shift towards rates normalisation, and any surprisingly positive inflation data. Roger Blitz
The futures contract battle over bitcoin intensifies
Chicago’s dominant futures exchange, the CME Group fires the starting gun for its much-anticipated contract on the cryptocurrency.
It comes a week after cross-town rival Cboe Global Markets launched a bitcoin contract and is a rare head-to-head race among exchanges to dominate a new market.
Cboe’s contract generated several thousand trades, only a fraction of the most popular futures contracts, but higher than some had expected.
CME says its contract is aimed at institutional investors who have been demanding the product. Its contract size will be five times larger, which is likely to deter smaller investors.
The launch comes as the price of bitcoin remained near record highs of more than $16,000 a coin, driven by growing public enthusiasm for the nascent market.
“No one knows where the cryptocurrency will go — but with late comers now rushing to invest, it strikes us that we may be entering a new more risky phase in a bubble where price action to the upside can be explosive,” says Mark Dowding, co-head of investment grade at BlueBay Asset Management.
FT Reporters
