Bumpy New Year Expected

Financial markets were grim last week, and investment chiefs expect volatile conditions in 2019. Mining equities and metals prices were amongst the casualties in another difficult week for the industry.

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Financial markets are on course for a grim year-end, and investment chiefs are predicting market volatility in 2019. The latest thing to frighten markets is the stand-off between the White House and Senate Democrats over funding for President Trump's wall on the border with Mexico. Overall, the S&P 500 share index fell nearly 6% last week ­— its worst performance in nine months.

The price of copper, zinc and aluminium all fell last week but gold and nickel improved and there was a particularly strong performance from iron ore. The latter was up for the third consecutive week, helped by the announcement of increased infrastructure spending in China.

Copper closed on Friday, in London, down 2.1% on the week at US$5,988/t, with zinc down 1.2% at US$2,502/t and aluminium slipping 0.4% to US$1,913/t. Gold rose 1.4% over the week to US$1,260/oz and nickel improved 0.6% to US$10,910/t. Iron ore (62% Fe) was the standout performer, up 3.4% at US$72.3/t, compared with only US$65.5/t at the end of November.

According to the Financial Times, investment bosses at funds that have US$21 trillion of assets under management warn that the high levels of corporate debt and tightening liquidity pose a risk to the global economy next year. The executives predict that volatility will be an overriding feature of markets next year, although this year's dominant factors (US-China trade tension, EU disruption and hardening monetary policy) will still influence their investment decisions.

Invesco's chief global market strategist, Kristina Hooper, said investors should strap in for a "wild and bumpy ride". She identified the three biggest risks for 2019 as protectionism, changes in monetary policy and high levels of debt.

With the existing high levels of corporate debt, analysts note that we are near the end of the credit cycle, with US credit markets grinding to a halt. With higher interest rates and increased market volatility, fund managers are refusing to bankroll buyouts and investors are shunning high-yield bond sales.

Higher interest rates were in the news on Wednesday when the Federal Reserve lifted US rates for the fourth time this year. The move was widely expected despite opposition from President Trump and acknowledgement from Fed chairman Jay Powell that there are risks from stormy markets. The US central bank lifted the target range for the federal funds rate by another quarter point to 2.25-2.50%.

Although the Fed pared back its forecasts for further rate increases (and even indicated increased uncertainty about the next move), equities fell sharply on the announcement. Analysts attributed this to expectations by investors of an even more dovish statement, and of the Fed's lower forecasts for the US economy. As noted in last week's HindeSight, the gap between short and long-term bond yields has narrowed considerably as the markets anticipate weaker economic growth and falling inflation.

Despite falling equity prices over the past three months, which have left the S&P 500 down 4% for the year, the Financial Times reported on Wednesday that Hedge funds are still reducing their exposure to equities. After years of buoyant markets, this year has been a challenge for investors and equity valuations in the US have dropped sharply ­— from 23 times earnings at the start of the year to under 18 now.

US financial stocks have been particularly badly hit, with the S&P Financial Sector index down almost 21% from its peak of late January. With mounting concern about economic growth and corporate profits, the US financial sector is now in bear-market territory.

As if that wasn't bad enough for the financial sector, deal-making has decelerated rapidly from the record pace seen at the start of this year. The December quarter of 2018 seem likely to be the quietest period for mergers and acquisitions since the third quarter of 2017. Also, with a slower pace of interest rate rises expected in 2019, and deteriorating credit quality, investors pulled US$3.7 billion from funds invested in North American bank loans in the week to Wednesday, December 19, according to data from EPFR Global.

On the bright side, oil prices are falling. Planned production cuts, led by Saudi Arabia and Russia, have failed to allay concerns about rising output elsewhere, centred upon increased production of US oil shales. The lower prices also reflect the concerns over lower economic growth, and so restrained demand for oil

Meanwhile, trade tension between the US and China continues to escalate. At the end of the week came news that Beijing has been accused by the US and UK of a worldwide campaign of corporate espionage through cyber-attacks. The charges, through the US Justice Department, allege that a Chinese hacking group, known as APT-10, has led a two-year effort against western companies targeting industrial secrets. 

In China, the country's top economic policymakers have promised more tax cuts and increased funding for infrastructure. The announcement came on Friday at the conclusion on the three-day annual Central Economic Work Conference.

Chris Hinde

Chief Commentator, Mining Beacon

Previously editorial director of Mining Journal, and more recently head of S&P Global Market Intelligence's metals and mining team, Chris is now Mining Beacon's editor-in-chief and lead commentator. He posts two blogs every week, one on Monday reviewing market conditions over the prior week, and a second on Thursday looking at issues on the global mining scene. There is also a quarterly blog on business opportunities in the sector.