The Radix Market View: Cautious Optimism
Caution tinged with optimism. That appears to be the general feeling about the global economy and crypto markets at the start of 2019.
Following a rather turbulent end to 2018, when most major stock markets slid into the red for the year, the relative market calm of 2019 makes for quite a difference. The fall in crypto markets in 2018, too, felt relentless and many commentators sharpened their quills once more to write Bitcoin’s obituary. The currency has, seemingly, been on its deathbed since the day it was founded.
The start to 2019 has seen the world’s major stock markets recover from their 2018 lows, although they are still some way from the record highs achieved in 2018. Whilst many downside risks remain, the potential fall-out (in some cases) is seemingly less likely or as far-reaching as might have been thought towards the end of last year.
Take, for example, the US-China trade war. Both sides had been engaged in intense talks to try to resolve the impasse before the 1st of March deadline set by President Trump for the further imposition of tariffs. In the search for a breakthrough, that deadline has now been extended to allow negotiations to continue. The President has indicated that he would prefer to do a deal. On the other side of the pond, in the UK, whilst not officially off the table, an extension of Article 50 has seemingly become more likely after the Government lost a vote on the current BREXIT deal by a record majority. No Deal is still on the table although it would seem that this scenario does not command a majority in Parliament. So, neither the current deal or No Deal appear to be palatable to our constituency representatives.
Coupled with the relative recovery in stock markets, crypto-currencies appear to be recovering from their own mini-slumps in January. This followed December’s seemingly nostalgic upswing — except there was no repeat of 2017.
Bitcoin prices are now nearing the $4,000 mark (a 17% upswing in February alone) and Ethereum, which is trading at $145, has gained almost 45% from its February low of $101.
Whether the price movements we are witnessing should be considered to be the green shoots of a potential bull run is difficult to assess, but the likelihood is that what we are seeing is similar to the recovery in stock prices. Investors are simply buying into assets that they consider to be of good value at the current price point vs. historical prices.
A bull run in crypto markets will, most likely, be preceded by a bull run in traditional markets as was the case in 2017. The reasoning for this would appear to lean towards institutional money now having a way to invest or bet on BTC, through futures contracts. Buying or selling futures on BTC with a small amount of institutional assets is a simple way to diversify assets and to buy into an asset that has potentially significant upside. As investments shift from safe assets (such as gold and treasuries) back into the riskier stocks the expectation is that some investment will find its way into crypto-currencies too, pushing up their prices.
The UK & Europe
The UK continues to grapple with BREXIT. With no deal having yet been agreed ahead of the 29 March deadline, current industry data points to a slowdown in investment. Indeed, in recent weeks, both Honda and Ford have announced plant closures and job cuts — although these have been blamed on a global restructuring — and the major banking groups have set aside hundreds of millions of pounds in provisions to help manage any BREXIT fall-out. The Bank of England (the UK’s central bank) has forecast the worst annual growth, at 1.2%, since the beginnings of the financial crisis in 2009. In spite of all the uncertainty and in the face of these external challenges the UK economy still has one of the highest growth forecasts in the OECD this year. Additionally, unemployment has fallen to 4% — levels not seen since the 1970’s.
Elsewhere in Europe the picture is a little more mixed. Germany, that steady engine of European growth, ended 2018 with a fairly big splutter. Following -0.2% growth in Q3 of 2018, the German economy was saved the blushes of recession (technically, two quarters of negative growth) by a flat final quarter. The slowdown was blamed on weaker car sales (a major industry for Germany) fuelled by a slowdown in the global economy.
Italy was not so fortunate. The Italian economy sinking into recession in the last quarter.
Despite the global headwinds other Eurozone economies posted faster-than-expected growth. On a quarterly basis, France and Spain grew 0.3% and 0.7% respectively, with Eurozone growth coming in at 0.3%. As with the UK, the factors that may affect European growth in 2019 are multi-faceted and may not necessarily be linked. BREXIT is causing some uncertainty, but so too is the slowdown in China and the US-China trade war.
For now, the US-China trade war continues to dominate US economics. The deadline for a deal to be agreed has been extended beyond the 1st of March; if no agreement is reached President Trump has threatened to impose tariffs on a further US$200bn of goods from China. This would be in addition to the tariffs already imposed on US$250bn of Chinese goods. This has led to some considerable diplomatic activity in recent weeks, causing The President to soften his position a little, and leading to an extension in the 1st March deadline. In recent weeks, Markets had already appeared to take the view that the 1st March deadline was no longer set in stone, with very little activity being linked to this.
The US Federal Reserve also appears to be falling back from its recent policy of gradual rate rises. Whilst accepting that US economic growth and unemployment figures are still robust, The Fed noted inflation was “muted’ and the US economy faced “cross currents” from a slowdown in Europe and China. It is a more cautious approach to the possible risks faced by the US economy of a global economic slowdown, rather than an explicit signal that US economic growth may be weakening. To underline the point that the US economy remains robust, US nonfarm payrolls (employment figures) increased by 304,000 in January 2019.
China’s economy is grappling with two major headwinds. The first is that Chinese economic growth is slowing down. The Chinese government is trying to make this a managed slowdown, as far as is reasonably possible. Growth in 2018 was 6.6%; the slowest rate since 1990 but still in line with forecasts. The second is the US-China trade war, as noted above. A further increase in tariffs has the potential to put a further dent in Chinese economic growth.
As China grapples with the threat of further tariffs, and a potential slowdown in exports, the Government is attempting to stimulate domestic demand. It has introduced a series of policies in recent months aimed at boosting domestic demand. These include investment in new construction projects, tax cuts and, in an attempt to free up capital for lending, it has reduced the level of reserves banks need to hold against deposits.
In short, the message for 2019 is a tale of cautious optimism. It would seem for now, to quote the famous British phrase, that we must simply “Keep Calm and Carry On”.