2019 Forecast: Falling markets and the US dollar growth

Upcoming year promises to be not easy one. Policymakers will have to deal with slowing economics, deteriorating business climate and consumer sentiment. Looks unlikely that 2019 will become a crisis year for developed countries, having been marked by recession in the USA or Europe. However, during the year, crisis processes may actively brewed. We could mention some points of weaknesses that are worth to pay attention to next year:

1. Debt burden in EM countries, particularly in China; 2. Consequences and probable development of trade conflicts; 3. Hard lending in developing countries; 4. Tighten of the Fed policy; 5. Stock markets’ fall that could turn into the real economic problems.

EM debt burden China’s excessive debt burden had gone out of focus in 2018 but may return quite quickly. Without abundant loans, the economy is slowing down rather sharply, and the Government recently promised some new stimulus, which could eventually turn into a new spiral of debt growth and renew previous fears.

Trade wars The trade conflicts’ impact is still poorly reflected in statistics besides business sentiment drop that we see in reduced PMIs around the world. However, at the beginning of the next year, the actual data will allow to estimate the scale of damage caused by uncertainty in the world trade prospects and change of usual flows. Despite the declared trade truce, we can hardly rely on that the negotiations between the U.S. and China will quickly and easily conclude as scheduled. This topic, in our view, is far from exhausting.

Hard lending Developing countries seem to have passed their peak of growth in 2018 and can continue to lose momentum in 2019. U.S. would be hindered by the effect of a high base and exhaustion of the impact from tax reform. Europe is suffering from uncertainty around Brexit, political instability in major economies and increased caution around trade wars.

Hawkish Fed Fed had raised its key rates in 2018 four times and predicts two more increases in the 2019/ Due to the demand for security after the recent turbulence, investors are no longer expecting hikes for the next year. In 2018 Fed acted according to its own forecasts, not market expectations. Such a hard line may not only push up the dollar demand, but also fueling the fears of stock markets, as well as provoking the outflow of capital from developing countries.

Market troubles the economy The longer the stock markets are under pressure or even without a sharp rebound, the more negative consequences there will be for the economy. Often the drop of the markets is a sign of the economy problems. But the opposite is true as well: weakening markets can cause disease even in a healthy country on worsening financial conditions.

Broken year 2019 is unlikely to be a year of unilateral trends. In the coming months it is quite worth to expect the development of pressure on the stock markets, despite the attempts of growth in the last days of December.

Strengthening USD It is possible that the dollar will experience some pressure at first, as the markets are confident in more dovish position of the Fed under Trump’s pressure. As a whole, the dollar index is capable to develop its growth. Depending on the combination of factors, we could see strengthening by 5-10%, in the area of 2015th highs, or to the peak levels of 2016th.

DJI falling to trend DJI risk to fall into the area of 20K against peak levels around 27K earlier. This will be a return to the long-term trend, formed from the lows ten years ago.

Alexander Kuptsikevich, the FxPro analyst