Crisis predictions, bitcoin loses its luster (for crooks), and U.S. stocks start 2018 off on a strong note. Here are some of the things people in markets are talking about.
Calling the Next Crisis
Well, that’s a dour way to start the year. In its annual outlook, Eurasia Group warned that “if we had to pick one year for a big unexpected crisis — the geopolitical equivalent of the 2008 financial meltdown — it feels like 2018.” The political consultancy firm cited uncertainty around China’s growing influence and the U.S.’s shrinking clout as one of the biggest question marks. Protectionism is also a growing concern. “We see a much greater fragmentation of the global marketplace because governments are becoming more interventionist,” Eurasia President Ian Bremmer said in a Bloomberg Television interview. Another worry that may impact markets is the continued deterioration in U.S.-Iran relations. The Trump administration said Tuesday that it may impose new sanctions on Iran as the number of civilians arrested in spontaneous nationwide protests that began last week neared 1,000.
Bitcoin Is So 2017
Bitcoin is losing its luster with some of its earliest and most avid fans — criminals — giving rise to a new breed of virtual currency. Privacy coins such as monero, designed to avoid tracking, have climbed faster over the past two months as law enforcers adopt software tools to monitor people using bitcoin. Monero quadrupled in value to $349 in the final two months of 2017, according to coinmarketcap.com, placing it among a number of upstart coins that rose faster than bitcoin, the world’s most valuable digital currency. Bitcoin roughly doubled in the same period, data compiled by Bloomberg show. In monero’s case, criminals are snapping it up because bitcoin’s underlying technology can work against them. Called blockchain, the digital ledger meticulously records which addresses send and receive transactions, including the exact time and amount — great data to use as evidence. Started in 2014, monero is very different. It encrypts the recipient’s address on its blockchain and generates fake addresses to obscure the real sender. It also obscures the amount of the transaction.
Preempting a North Korea Missile Attack
The Trump administration’s national security strategy calls for a more aggressive approach toward stopping a North Korean missile strike on the U.S, but it’s unclear that Washington has the technology or on-the-ground intelligence to effectively carry out a preemptive strike, according to analysts. Unveiled in December, the strategy calls for a layered missile defense approach “focused on North Korea and Iran to defend our homeland against missile attacks. This system will include the ability to defeat missile threats prior to launch.” Yet some are questioning the feasibility of such a strategy at present. It would depend on enhanced, real-time intelligence, surveillance and reconnaissance to detect and track mobile launch vehicles for attack, according to Michael Elleman, a senior fellow for missile defense at the International Institute for Strategic Studies. North Korea’s rapid 2017 progress in developing ICBMs and nuclear weapons took most analysts by surprise, highlighting some of the existing intelligence shortfalls.
U.S. Stocks Start 2018 Where They Left Off
Tech stocks, one of 2017’s best performing sectors, once again led equities higher in the U.S. to start the year. The Nasdaq 100 Index climbed more than 1.5 percent. In the commodities space, gold started 2018 on a strong note, advancing for an eighth session after ending 2017 up 14 percent. West Texas crude fluctuated as Iran said protests in the country will fade in the coming days. In Europe, stocks started the year in the red, failing to capitalize on a positive Asian session as the strength of the region’s common currency weighed on exporters.
Wednesday will bring markets closer to being fully back to business after the New Year with only Japan and Russia remaining shut among major exchanges. It’s also the day when MiFID II, the biggest change to European investment industry rules in a decade, takes effect. We also get the return of the U.S. Congress with the Republican Senate majority set to shrink to just a 51-49 advantage. That may add some excitement to wrangling on immigration, health care and the budget. The Fed releases minutes from its December meeting when it raised rates as expected. Asia will be eager to see just how far local currencies can go without undermining the region’s impressive stock rallies. Taiwan and Korea each saw strong FX and equity gains, while Malaysia’s shares retreated as the ringgit advanced. Thailand gets data on manufacturing and inflation, while Hong Kong reports retail sales.
And finally, here’s what David’s interested in this morning
The most compelling economic story in 2018, I feel, will be a toss-up between Japan and India. Now, if you really forced me to pick one, I’d guess Japan may be more fascinating to watch. Here’s why. India in 2017 was about aggressive, unpopular policies put in place to unlock deep-seated constraints to growth. Japan on the other hand was pushing the limits of the economy’s current capacity. Indian Prime Minister Narendra Modi started to overhaul the old engine. Japanese PM Shinzo Abe (along with Haruhiko Kuroda, the Bank of Japan’s governor) looked to see how fast the old car could be made to go just by changing the oil. Both churned out positive results. India, though, is likely to show up more in 2019 when these one-time disruptions completely make their way out of the system. Meanwhile Japan is arguably achieving more relative to potential.
Take the annual change in retail sales. The 20-year average is roughly -0.4 percent. The average throughout Abenomics is about +0.8 percent. The most recent number for November was +2.2 percent. Take the labor market. It’s encouraging to see many women and elderly rejoining the labor force. But there are naturally questions over sustainability when you have about a quarter of people over 65 in employment! So it’s been good but there’s also a concern how much faster can this old car go before the lack of horsepower kicks in and the engine blows. Abenomics is entering its sixth year. Here’s an excellent summary of what’s been achieved and what hasn’t.