Few investors will look back fondly on the past 12 months, and December saw some of the bleakest times since the financial crisis. The dramatic final month of 2018 left almost every major asset class in the red for the year. Cash was a notable exception as the main central banks retreated from their policies of easy money — the US Federal Reserve raised overnight borrowing costs every three months.
The rising US interest rates powered a big rally in the dollar, and left bonds weaker, especially those for emerging markets. Global stocks had their worst year in a decade after a final quarter when global trade fears, political turmoil and the end of economic stimulus sent shares tumbling.
The volatility in 2018 has analysts trying to predict what markets will face this year. As the Financial Times noted last week, the 10-year US government bond yield (arguably the most influential interest rate in the world) is the one to watch. The US$14 trillion market staged a robust rally at the end of December, with yields falling as fixed-income investors began to anticipate a US economy declining from the stimulus-induced high.
The pessimism in the US might be overdone, however, and the consensus on Wall Street is for the 10-year bond yield to end 2019 at over 3.4%, according to a Bloomberg survey. If that scenario unfolds, the dollar is likely to rise further as investors chase the higher returns available in the US — and markets are currently very long on the dollar. Nevertheless, the consensus among banks is that the dollar will decline in 2019, with much of the weakness expected in the second half of the year as shifts in monetary policy begin to favour other currencies, including the euro.
On Friday the chair of the Federal Reserve, Jay Powell, offered an upbeat assessment of the country's economic prospects. This follows a strong jobs report, which has eased fears of a 2019 downturn that had spooked global investors in recent weeks.
Mr Powell said markets had moved "well ahead of the data" in pricing in risks to the US economy, and said "US data seem to be on track to sustain good momentum into the new year". Mr Powell said the Fed would take a "patient" approach to monetary policy tightening, and his reassurance has countered fears about and waning corporate profits and the impact of US-China trade tensions.
Meanwhile, there are signs of progress in these trade negotiations, with Beijing saying it is willing to work with the US to implement the "important consensus" reached at the recent G20 meeting. Xi Jinping is quoted as telling President Trump that he "hopes that the two teams will meet each other half way, work hard, and strive to reach an agreement that is mutually beneficial and beneficial to the world as soon as possible". Officials from the two sides are meeting today (Monday, January 7) for the first formal talks since the start of a three-month truce in the trade war.
China's trade dispute with the US, and a crackdown on shadow banking in the country, made China the world's worst-performing major stock market in 2018, shedding some US$2.3 trillion in value. Investors say that while China's intensifying trade war with the US grabbed much of the attention, a government campaign against leverage in the financial system played a big role in slowing market demand and forcing some funds into liquidation.
Despite the market turmoil last year, gold was unloved for much of 2018. Against a backdrop of rising US interest rates and a strong dollar, the precious metal struggled to move higher. That all changed towards the end of the year as US equity markets came under pressure and investors looked for safe places to warehouse cash amid rising concerns about a slowdown in global growth.
Gold rose 8% in the final quarter and closed the year near a six-month high at US$1,284/oz. This followed the release of weak data from China, which showed the country's manufacturing sector had contracted for the first time in 19 months in December. The precious metal moved to US$1,290/oz by the close on Friday, January 4, and looks set to break through US$1,300/oz.
Aluminium fell 3.1% in the final full week of the year to close on Friday, December 28, in London at US$1,853/t. This left the metal down 18.7% since the end of December 2017. Copper was up 1.0% on the week at US$6,050/t, down 17.0% over the 52-week period, with nickel 2.2% weaker at US$10,670/t, down 13.9% on the year. Zinc was the year's big loser, down 25.4% after losing 1.6% in the final full week, closing at US$2,462/t. Iron ore (62% Fe) was little changed over the year after gaining 0.6% in the final week at US$72.7/t.
The first week of 2019, to Friday, January 4, has seen price improvements for aluminium (up 0.6%), nickel (up 3.6%) and iron ore (1.0%) but price declines for copper (down 3.3%) and zinc (1.7%). Thermal coal prices slipped for the third consecutive week.
There was positive news in December for explorers of copper, cobalt and lithium with the launch of a new fund to invest in battery metals. The fund, which will seek to benefit from the scramble for electric vehicles, is being established by Erik Prince, who was the founder of private security company Blackwater (which came to prominence as a private military contractor in Iraq and Afghanistan). Mr Prince sold Blackwater in 2010, and since then has run Frontier Services Group, which provides security and logistics services to companies in unstable countries.
Mr Prince, a campaign adviser to President Trump and brother of US education secretary Betsy DeVos, told the Financial Times that he is hoping to raise up to US$500 million to invest in the supply of battery metals. Mr Prince said the new fund would target unexplored deposits that could be brought into production.
Mr Prince said the fund will look to sell its investments after four to five years to larger mining companies. He added that "Chinese companies are not necessarily interested in the very upstream exploration. They want to buy something in production which leaves that gap for us."