December 31, 2018

Hello 2019!

Successful traders do not have a crystal ball. They identify and assess risk and then act accordingly.

As 2018 ends and we look forward to 2019, what risks should we concern ourselves with?  I am going to concentrate on three main areas of risk for traders in the United States: a continued trade conflict with China, the effect of Brexit on the global economy and stability in the oil-producing region of the Middle East specifically with regards to Saudi Arabia.

Trade Conflict with China

When the current U.S. administration made it clear that there would be a different approach to our trade practices, I was skeptical.  I felt that China was better positioned to play the long game.  China does not have to play by the same political cycle rules that the United States does.  They do not have to plan for a potential political upheaval every two, four or even six years in the future.

Chinese President Xi has all but made himself president for life and can make his plans on a much longer timeframe than any U.S. President can.  However, a Chinese stock market that has declined roughly 20 percent from its 2018 highs while the U.S. equity markets have, at least for this year, held relatively steady has tempered my stance.  As the countries embark on a supposed “trade truce”, their actions going into 2019 will be very telling.

Brexit

After months of negotiations, the UK and EU came up with a 585-page withdrawal agreement. This covers how much money the UK owes the EU, which is an estimated £39 billion.  It also covers what happens to UK citizens living elsewhere in the EU and EU citizens living in the UK.

If this sounds messy and daunting, it is.  The EU does not benefit from the UK leaving.  The EU is not going to let the UK leave quietly and thus it will not take much to roil the markets.  Any instability will most likely affect the currency markets initially and then that will cause a ripple effect to equity markets.

Political Climate in the Middle East

The Middle East is the global crossroad.  From trade to politics to religion. Add to this the fact that the Middle East controls and/or produces much of the world’s oil supply, and it becomes a region of intense interest for oil traders. Looking at how Saudi Arabia, in particular, manages its politics and relationship with the United States will be a major story in 2019. OPEC, with Saudi Arabia as its de facto leader and Russia recently announced production cuts, but it remains to be seen how much impact that may have on U.S. production, and whether American shale producers can continue to thrive if prices drop early in 2019.

Cuts will affect prices, but how much and for how long will only be known at some point in the new year.

Even without a crystal ball, traders will be ready to absorb moves related to these events right off the bat in 2019.

Follow me on Twitter: @CboeSIB

about the author:

Scott Bauer

A respected market commentator seen on Bloomberg, Fox Business, CNBC and other major financial networks, Scott Bauer has 25 plus years of professional equity and index options experience at the Chicago Board Options Exchange (CBOE) and Chicago Mercantile Exchange (CME) and as a Vice-President/trader for Goldman Sachs. Scott graduated with Honors from the University of Illinois Business School and has taught classes both at his alma mater and at the CBOE.

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