Outlook 2018: Equity Rally To Continue; Eyes On Oil

2017: A risk-on record breaking year

It was a record-breaking year for stocks, with some U.S. stock markets making breaking records a daily occurrence. The UK market joined in the record breaking year, however Brexit uncertainties held investors back. The weaker pound, often seen as FTSE-friendly, was not enough to bring the UK stock markets in line with global peers.

It was undoubtedly the year of the cryptocurrency. Bitcoin started the year around $1,000 to reach record highs of $19,666 In December. Bitcoin futures are now trading on global platforms CME and CBOE, while a variety of altcoins - alternative cryptocurrencies - have also seen their value rocket.

Traditional safe haven gold was dented by the crypto-frenzy. Gold saw a small uptick on the first intercontinental ballistic missile test from North Korea, however the subsequent tests, which saw missiles launch over Japan, failed to push gold higher.

It was a fairly gloomy year for UK markets as the country adjusted to the the result of the June 2016 referendum, when the country voted to leave the European Union. Confidence in the market was shaken by uncertainty surrounding the UK’s future position outside the European Union.

The snap election in June 2017, just before negotiations to leave the EU began, further clouded the UK outlook. Prime Minister Theresa May lost her majority in government, and left her mandate at the will of her Brexiteer backbenchers and the Northern Irish Democratic Unionist Party, now kingmakers. Party infighting and bat and ball between the chief Brexit negotiators on opposite sides of the Channel have done little to help the beleaguered pound. Following the referendum, the pound plummeted, while higher inflation and stagnant wage growth led to the downward revision of growth forecasts for the coming years.

The pound spent much of 2017 at the mercy of the political hopscotch surrounding the negotiations. While GBP has lifted itself away from post-referendum lows of near 1.20 against the dollar, some of this can be attributed to dollar weakness. Looking closer to home, the Brexit impact can be seen on sterling's performance against the euro.

Growth in the euro-zone has seen the single currency spend much of 2017 hovering just below 0.900 against the pound. While the euro-zone has had its fair share of political drama - calls for independence in the Spanish region of Catalonia and the fact Germany hasn’t had a government since September - booming growth throughout the currency bloc has triumphed to push the EUR higher.

2018 will be the make or break year for the Brexit deal. December 2017 saw a lightening of the Brexit mood amidst more positive rhetoric from both camps, so the year ahead may continue in this vein.

As we enter phase 2 of the Brexit negotiations, when details of the all-important trade relationship will be discussed, we asked a number of our most popular contributors to tell us how they believe markets will perform into 2018.

The recent upsurge in Bitcoin and other cryptocurrencies may have had a direct impact on precious metal prices, if one can assume they are viable substitutes for paper gold and silver.

Like a herd, market participants have a tendency to follow the money. So when Bitcoin goes up in value by hundreds, if not thousands, of dollars per day, the fear of missing out (FOMO) kicks in and speculators rush to buy the cryptocurrency because they don’t want to be left out. Often they fund these positions by liquidating their assets elsewhere, especially those which have been underperforming. With gold and silver failing to make any good progress for months, if not years, this is why I think precious metals have been undermined by Bitcoin as investors have made better use of their funds. But whether a big bubble is being formed in Bitcoin and when that might deflate, no one knows. However, one thing is for sure: Bitcoin will never be gold or silver, whatever nominal value it might attain. Bitcoins can easily be hacked, deleted by mistake, and potentially go back to zero when there is a significantly better substitute available. In contrast, gold and silver represent physical stores of value that cannot and will never go to zero.

The other problem for precious metals is that at the moment they are being overlooked, not just because of the ongoing hype for cryptos but also because of investors’ insatiable appetite for risk as the global stock indices continue to hit multi-year or record highs almost on a daily basis. In addition, precious metals are denominated in the dollar, which has managed to rebound in recent days after falling for much of the year. But if Bitcoin and/or Wall Street crash soon, then the safe haven commodities should make a comeback.

Other factors that might help support gold and silver include, among other things, geopolitical risks, inflation, and a sustained increase in physical demand or restriction in supply. These factors are near impossible to predict. But, ultimately it will be the direction of the dollar and stock markets that gold and silver investors will need to concentrate on the most going forward. While a rebound in the dollar would be bad news for precious metals, it is likely that the stock markets will correct themselves at some stage. When this happens, the appeal of safe haven precious metals will rise.

Now read Part II for contributor thoughts on Gold, Silver, Oil, USD, Euro and Central Bank Policy.

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Written By: Investing.com