Market Commentary

Global financial markets ended 2018 on a sour note and sentiment remained fragile as deepening pessimism on the state of the global economy and the prospect for a drawn-out US government shutdown overshadowed some signs of optimism regarding US-China trade discussions. In stark contrast to the calm and rewarding market conditions witnessed in 2017, volatility reasserted itself throughout 2018 amid a myriad of global economic and geopolitical developments that stifled risk appetite – with most major asset classes ending the year in negative terrain.


Global equity markets were hit particularly hard in December. The S&P 500 led the monthly rout and erased its gains for 2018, marking its first negative annual return since 2015 – while the S&P/TSX declined alongside the steep drop in crude prices. The monthly retreat also extended to overseas markets, with political and economic anxieties roiling European bourses, while Japanese equities breached bear market territory as the strengthening yen and global trade anxieties pushed the nation’s exporters lower. Finally, emerging market stocks ended December on the defensive but managed to outperform their global peers as attractive valuations and a weaker US dollar lent some support during the month.

Not surprisingly, North American fixed income markets received a safe-haven bid in the otherwise tumultuous trading environment. Global bond yields slid lower as global growth concerns and the precipitous slide in oil prices weighed on inflation expectations. The flight to bond markets was amplified further by the slump in equities, which prompted investors to reduce their wagers for policy normalization in the coming year. Notably, US markets are now expecting that the Fed has all but completed its tightening for this cycle, while Canadian markets are pricing only a 20% chance of a rate hike during the first half of 2019.

In currency markets, the greenback ended the month lower amid reduced wagers for fed fund rate hikes, political strife in Washington, and as President Trump scrutinized Fed Chair Powell for raising interest rates. In contrast, the euro gained after Italy’s populist government succeeded in obtaining parliamentary approval for its 2019 budget after several months of intense negotiations, while the Japanese yen was bolstered in the environment of heightened risk aversion.

In commodity markets, crude prices slumped even after OPEC and its allies agreed to a larger-than-expected production cut in 2019. Instead, fears of a global supply glut resurfaced on the back of record pumping from American drillers and a corresponding surge in US stockpiles. And after hitting record lows in November, Western Canadian Select prices soared higher thanks to mandated production cuts from the Alberta government, which helped to close the heavy oil differential. Meanwhile, gold thrived in December as turbulent trading conditions stoked demand for the metal as a haven, while copper extended its latest slump as fears of slowing growth in China weighed on the outlook for demand.