The past 12 months have been largely positive for the stock markets, but the macroeconomic scenario appears increasingly uncertain as we enter 2018.
The main question still concerns the future of stock markets: after the great rally of recent months, is there still room for further rallies next year or is the bear going to dominate the scene again after a long bullish round?
And what of crude oil? Even if its price has doubled compared to the lows in early 2016, can it really continue on this path or will investors be more interested in assets like Gold?
Macroeconomic and geopolitical uncertainties undoubtedly remain concerning. Skepticism over the Federal Reserve’s real objectives and policies has grown significantly, as the central bank does not seem able to realise its goal of raising interest rates.
On this side of the pond, European Quantitative Easing will continue (even if reduced) at least until September 2018. The progress of the so-called populist parties will paint new scenarios for Europe, while Germany remains without a government.
Significant uncertainty is also on the table in Great Britain. In fact, doubts about the Brexit negotiations and the political weakness of Theresa May have offered a scenario that observers are struggling to analyse, even if the general picture seems to mean a slow-down of British economic growth.
Last but not least, tensions between North Korea and the United States is far from being resolved (with earlier missile tests having an effect on global stock prices last year).
The currency markets were characterised by the clear recovery of the euro during the first 8 months of 2017, as the EUR / USD rate has increasingly moved away from parity, rising from 1.05 to over 1.20 in September. However, the area around 1.20 / 1.21 worked as a significant resistance level and lowered prices.
Market Perspectives for 2018
The general trend remains positive, but there are growing signs that a conciliatory pause in the markets – especially the United States – will be needed after an unstoppable rally. The weakness of the US currency, which was one of the most important issues of 2017, helped this Wall Street rally.
If the greenback (or US dollar) manages to recover, we could have a slowing down of this climb and some fund managers could shift their investments to the European market or assets such as gold.
The future of EUR/USD depends crucially on the uncertain macroeconomic scenario described above. Markets are trying to predict central bank decisions for 2018. Any delay in interest rises aroused by the Fed could push the greenback down, while any dovish statements from Mario Draghi will have a similar effect on the euro.
The general trend is still positive for the Eurozone currency, although we are ending 2017 with an important consolidation between 1.16 and 1.205. If this pair could return above 1.21 we will have the first positive sign they could rally during 2018 up to 1.26 / 1.27.
Vice versa, a decomposition of 1,155 will generate a negative scenario, with an increasing possibility of the pair returning to the previous interval between 1.08 and 1.15. So at least for the first part of 2018, the scenario will likely be a continuation of the consolidation recorded in the last months of 2017 between 1.16 and 1.21.
The British currency recovered almost 10% in 2017 against the dollar. Overall, the pound continues to dance on the news coming from the Brexit negotiations. At the end of November, we had a breakup of the resistance area at 1.33.
This helped the pound to recover up to 1.35. The trend still looks favourable for the pound and the first target will be the September peak registered at 1.362-1.365.
If there is an agreement with the EU on Brexit we could also expect the pound to continue its recovery up to 1.40-1.42 during 2018. Otherwise, if there is another deadlock in the negotiations, the pound could fall back into the range 1.26-1.30 against the greenback.
In recent months the EUR/GBP has moved in the trading range between 1.11 and 1.14. A breakout in either direction will tell us the main story for 2018.
An agreement on Brexit could probably push the pound to break 1.14 and return to a higher range between 1.14 and 1.20, which could be the trading range for the next year with a positive outlook.
Any problem with the Brexit talks could push the UK currency down. We will have a weakened first sign below 1.11, with a “danger zone” if prices fall below 1.08.
Gold is claiming attention and next year could be a good year for bullion. After over a decade, mining production has begun to slow down, while Asian demand (which was at its lowest in 2016) is expected to recover slowly.
Any correction in the stock markets or any delay on interest raised by the Fed could lead investors to bet on gold, which in 2018 we can expect to regain its role of safe haven in the markets.
The year 2017 was definitely a great one for bitcoins and cryptocurrencies. After this incredible rally where the price has risen from just $758.81 a year ago, to $11,636. The story going forward may be one of government regulations and increased activity in the derivative markets for the coins.
In 2018, Investors will be wondering if this will become the huge bubble many have suggested or if the investment can continue to provide unmatched growth and go for further rallies. Either way, it may start to not feel too dissimilar to red and black in a casino.
Carlo Alberto De Casa is chief analyst of ActivTrades, a company he joined in 2011. He provides regular commentary for UK outlets including the BBC, Telegraph, Independent & Reuters UK. He is also a weekly commentator for CNBC Italy, a columnist for La Stampa and has written a highly regarded book on the gold market entitled ‘Secrets to invest in Gold’ published in the UK in 2014. This article published first by IBTimes.