Stocks look set for a tough start to 2018, bitcoin tumbles into the New Year, and North Korea makes its most peaceful overture since President Donald Trump took office. Here are some of the things people in markets are talking about.
Not Such a Happy New Year for Stocks
(Bloomberg)-Many Asia-Pacific markets are back in business Tuesday, and look set for a challenging start to the year: U.S. stocks ended 2017 well and truly down and India followed suit when markets there opened Monday as other regional markets stayed shut (meanwhile Japan will open for 2018 trading on Thursday). The stumbles from American equitieslast week may have owed much to year-end adjustments — many of the biggest losers on Friday were among the biggest winners for 2017. Still, it does make for a potentially gloomy start to 2018 as investors wonder if equities can build on rallies last year that delivered the best global returns since 2009.
Bitcoin Takes a Tumble
Bitcoin is nursing an almighty hangover after last year’s almost non-stop partying delivered a 1,403 percent gain in 2017 for the virtual currency. December piled on the pressure, with regulators in a number of jurisdictions expressing concern that digital currencies may be dangerous and South Korea moving to crack down on trading in them. It has also faced growing competition from a range of other digital currencies such as bitcoin cash, ethereum and Ripple. Bitcoin dropped under $13,000on Monday after spending most of the final week of 2017 struggling to hold above $15,000 and mostly failing. There is some prospect that the $19,511 peak reached Dec. 18 — not all that long after CME futures started trading — may represent a near- or even medium-term cap for bitcoin.
Unrest in Iran
The death toll in Iran rose as security forces clashed with demonstrators rallying in a rare show of displeasure with the country’s leaders. As many as a dozen people may have died, according to state TV and local reports. Iranian President Hassan Rouhani, seeking to calm the unrest, on Sunday defended the Iranian people’s right to protest while urging them to work with his administration to address what he said were justified grievances about the economy. U.S. President Donald Trump tweeted that the country was “failing at every level” and called for change there.
North Korea’s Olive Branch
North Korean leader Kim Jong Un started 2018 on an optimistic note, with a New Year’s Day speech calling for talks to ensure the success of the Winter Olympics in South Korea next month, and to improve overall inter-Korean relations. The speech is a tactical shift for the isolated North Korean regime, and the overtures were quickly welcomed by Seoul. But it may also present a new test for the U.S.-South Korean alliance, which became strained at times last year. After a year in which North Korea conducted more than a dozen ballistic missile tests, Kim was quick to point out that “It’s reality, not a threat, that the nuclear button is always on my desk.” When asked about Kim’s threats at a New Year’s Eve gathering, Trump said: “We’ll see, we’ll see.”
China’s official PMI releases over the weekend showed that Asia’s biggest economy ended 2017 on a relatively strong note. The manufacturing gauge edged down to 51.6 in December, but that was in line with economists’ forecasts and still in pretty healthy expansionary territory. Just how successfully China can manage its attempt to shift to a slower, more sustainable style of growth will be one of the key stories for 2018.
Tuesday brings a plethora of PMIs across Asia, including the Caixin China measure and reports for India, Malaysia, Indonesia and the Philippines. Singapore reports GDP, which may surprise on the upside and help to drive sentiment going forward after recent figures showed very strong industrial output and exports for the city state.
And finally, here’s what David’s interested in this morning
Everything’s perfect in a mother’s womb. After birth, it’s pretty much downhill. We should look at equity markets in 2018 through that prism — a transition into cruder conditions, if you will, because 2017 was just immaculate. For the first time on record, the MSCI All Country Index (MXWD) got through an entire calendar year without a single monthly drop. Chances are that’s not going to happen again in this lifetime. The risk trade enjoyed near-perfect conditions to flourish. Naturally, any variance from the current settings would likely be counterproductive.
Most money managers are well aware and the challenge is setting appropriate client expectations. MXWD gained over 20 percent in 2017. MXEF (emerging markets) was up 33 percent. The 30-year average is 7 percent and 13 percent respectively. Statisticians call those things outliers (or what Jedis might call a disturbances in the force). Admittedly, we’ve had a couple of better years. But those were slingshot moves up following things like the global financial crisis. Anyway, I had this conversation with Kate Warne of Edward Jones about three months ago. And as early as back then, she was already warning of mean reversion. She noted that when you have valuations above historical averages for prolonged periods, the next decade means we move below average — her guess is 6 percent to 7 percent. What’s yours? And happy new year! Good luck. Let’s do this.