Is now a chance for markets to reclaim lost ground after December’s wild swings?

Global financial markets closed the last trading month of 2018 on a mixed note. While we had sustained weakness across US asset classes, major currencies and commodities turned in a stronger performance against the US dollar amid lower trading volumes in the holiday season.

But perhaps the biggest eye-opener in December was the underperforming US equity segment. The S&P 500 stock index closed the year after three successive quarters of gains. The reversal to close the year 7 per cent lower after gaining almost 9 per cent through the first nine months of 2018 was a historic first.

Similarly the Dow Jones 30 index reversed from being up 7 per cent in October to more than 5 per cent down on the year. It has been a month of wild swings in US stock markets because of lower holiday volumes and January will be pivotal in paving the way for the first quarter.

Following the split in the US Congress in November’s critical vote, we noted it would be a testing time for US asset classes and there is little to change this view. Typically, January is seen as the hangover month – following a strong period for retail sales.

We will turn our attention to when corporate earnings season kicks off on January 14. Better-than-expected earnings could provide short-term relief rallies, but overall I maintain my bearish bias in US equities through the first quarter. Relief rallies in the interim could be boosted by favourable developments in the ongoing US-Sino trade war story.

In November during the G20 Summit in Buenos Aires, there was an agreement to suspend the increase in US tariffs on Chinese goods from 10 per cent to 25 per cent on January 1. In recent days President Donald Trump tweeted on the optimism of the progression of trade talks with his Chinese counterpart. This theme should develop more through the middle of the first quarter, but again watch for intraday opportunities on the back of this developing theme.

The US dollar index turned in a relatively low-key December, ending 1 per cent lower following an impressive overall showing in 2018. Outperforming most major currencies, the dollar is still well positioned against its counterparts. I have continuously stated that amid the current Fed rate hiking cycle, the dollar would continue to be well bought – and Commodity Futures Trading Commission data shows that the number of dollar long positions have grown to the highest levels since May 2017.

While I expect to see a push towards the 97 channel through March 2019, the recent Federal Open Market Committee projections for 2019 will dampen some of the bullish dollar optimism. Future rate increase projections were slashed in December’s meeting – and with the European Central Bank possibly in a position to look at rates in the summer, we could be beginning to see this more than year-long dollar rally begin to dampen.

Also, keep an eye out for Brexit developments as the March 29 deadline looms closer and Parliament returns from Christmas recess on January 7. MPs were set to vote on Prime Minister Theresa May’s Brexit deal back in December before the prime minister famously pulled the vote at the last hour. With the debates set to restart again following this recess, markets could have a vote result in the second week of January.

Volatility will remain high in the British pound, and with not much changing since December Mrs May faces a tough uphill battle to get a deal delivered. Considering this, another test of those sub 1.25 levels in GBP/USD could be on the cards in the month ahead.

Gaurav Kashyap is a market strategist at Equiti Global Markets. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti