All you need to know about global markets in 2018

The year is coming to an end, for which we are accustomed to the US president’s nightly tweets, record-breaking stock prices and bitcoin bubble.
We are entering the year 2018, knowing that a stable rally of assets and a decrease in volatility has become the norm, global growth remains strong, and optimism prevails over different asset classes. And yet now is not the time to relax.
In the next 12 months, we can keep in suspense a myriad of threats – from politics to the loss of attractiveness of popular strategies. Let’s start with some of the most important topics for the market – both encouraging and disturbing.

The extinction of the debt rally
Of course, the proclamation of the end of the world in the market of “junk” bonds turned out to be premature, and investors could earn this year on high-yield bonds and on bonds with investment ratings, but the market growth in 2018 threatens many risks. The Federal Reserve reduces its balance sheet, the European Central Bank reduces purchases, and forecasts show that inflation may finally rise.
Investors in the debt market, who participated in the December poll of Bank of America Merrill Lynch, called the formation of a bubble the biggest threat to this class of assets, followed by accelerating inflation and rising yields. Capital flows partially reflect these fears. Investors in December withdrew funds from exchange-traded funds that track corporate debt, for the first time in 14 months, according to data in the terminal Bloomberg.

Aging of the business cycle
If the US economy can slowly but surely move forward in the first quarter of 2018, then such a period of growth will be the second longest in modern history, according to data compiled by the National Bureau of Economic Research and Bloomberg Intelligence.
In the coming year, investors will have to assess the stability of the cycle amid risks of financial overheating and the debt burden of US companies.

Attention, elections
Investors will have to take into account elections in countries whose weight in the local bond index of Bloomberg Barclays is more than 50 percent. Although the results of voting in such countries as Russia are predictable, Brazil and Mexico – the other two heavyweights of the EM region – there will be a tough election campaign.

Euro rally
The euro may finish the year with the maximum strengthening to the dollar for 14 years, and options markets, which reflect the prospects of the world’s most traded currency pair, indicate the continuation of the rally in 2018. The probability of a single currency growth to $ 1.229 by the end of the year is 67 percent, and the chances of its strengthening to $ 1.256 are 50 percent.

Political unpredictability
Investors can add to the list of risks the elections in Italy, as well as Brexit and the continuing tension on the Korean peninsula.

‘Normal’ swaps
One of the relatively strange distortions that have emerged in the market due to post-crisis regulation may come to naught. The swap rates that companies use to exchange their fixed interest payments to floating ones may exceed the yield of US Treasury bonds for the entire range of maturities for the first time since 2014.
The strategists predict that the Republicans’ plans to mitigate the regulatory requirements introduced after the crisis will increase the attractiveness of investments in treasury bonds, and their profitability will fall below the swap rates. This shift is important, since swap rates are a benchmark for a number of debt instruments, including securities secured by mortgages and auto loans.

Return of volatility
In 2017, investors were surprised by the almost complete lack of volatility. In 2018, the winning return of price fluctuations could be a signal of alarm for them.
The strategists, who control assets of $ 2 trillion, expect to generate profits in conditions of market stability, according to the October estimates of Christopher Cole of Artemis Capital. This increases the risk of large losses in equity and bond markets around the world if volatility eventually returns.

New faces of the Fed
Jerome Powell next year will not be the only “newcomer” in the US central bank. The composition of the “big three” – the chairman, vice-chairman and head of the Federal Reserve Bank of New York – will completely change after the expiration of the term of office of Janet Yellen in February and the departure of the FRB head of New York in the middle of the year.

The yield curve
The narrowing of the spread between the rates on short-term and long-term US Treasury securities continues to remain in the focus of Wall Street. Completely flat – or inverted – the curve can destabilize bond trading, challenge the Fed’s plans to tighten monetary policy and increase the risk of a recession.

According to forecasts of six of the 11 analysts polled by Bloomberg in early December, the yield curve of the US state bonds will take an inverted form – at least for a short time – in the next two years, and four expect such a scenario in 2018.

Do not forget about China
Chinese bonds will again be under pressure in the first half of 2018, as the central bank will tighten monetary policy, and the government will tighten the nuts with financial regulation, Becky Liu predicts, the main macro strategist Standard Chartered Plc. on China. According to her, the growth of profitability will attract Chinese and foreign investors in the second half of the year.

How long will the parabolic growth of bitcoin last? Looking who predicts. The head of the hedge fund, Michael Novograz, admits that the Crypto currency will reach $ 40,000 by the end of the first quarter. “Bulls” say that the recent launch of futures will expand access to digital currency, as derivatives are the first step towards ETF and other more liquid instruments.
Skeptics, however, point to a possible trick of regulators. Crypto-currency “can stop as if” if states start applying anti-money laundering laws, warns Mark Ostwald, global strategist at ADM Investor Services International in London.