Here are some critical issues to watch around the globe over the coming month:

North America

The Fed took its benchmark rate from 2.25% to 2.5%. On top of this hike, Fed officials announced they were reducing the projected number of hikes from three down to two for 2019. It seems that Fed officials are coming to the conclusion that for the current macro-environment the benchmark rate is approaching the neutral level they desire to see.

Defense Secretary Jim Mattis resigned in protest of President Trump’s decision to withdraw American troops from both Syria and Afghanistan. The continuous tremors and declining credibility of the administration will be affecting its effectiveness.

The US government shut down after President Trump’s insistence for wall funding. This is the third government shutdown this year as President Trump doubles down on his unwillingness to negotiate. The Democrats are willing to designate money for border security but not for the Mexican wall border.

The S&P 500 and Nasdaq Composite are on pace for their worst quarter in seven years, as the stock market has continued its drop. The drop resulted in the worst Christmas Eve performances in history, and, despite having the best day in nearly a decade on Dec. 26th, the stock market exhibits signs of significant volatility due to earnings repricing, lower expectations, a slowdown in growth, the trade tensions with China and the uncertainty surrounding Brexit. Given the significant drops in equity markets, a recent rally that started on December 26^th may give some momentum to the market in early 2019.

Europe

UK Prime Minister Theresa May has survived a tumultuous leadership contest; however, she has pledged that she will not seek another term as Prime Minister. As the clock ticks down, it is becoming clear that the UK is headed for a hard Brexit. The turmoil surrounding Brexit has, and may continue to, place pressure on the pound and British equities, which however have been cheapened enough to start becoming attractive. If the UK does go through a hard Brexit the currency may weaken even further, inflation could spike, unemployment would probably rise, mortgage defaults could increase, and UK equity markets could experience another drop. A dollar-cost-average approach to British exposure has started looking very attractive.

In Germany, Annegret Kramp-Karrenbauer, a.k.a. AKK, has been selected as the next leader of the CDU. AKK is considered “business as usual” and was the desired successor of German Chancellor Angela Merkel. AKK’s ascension to leadership has calmed many fears about any shift of the CDU further to the right. However, her rise to leadership has done nothing to address concerns about the waning coalition, and it remains to be seen if putting a new face on the same policies will carry the day with the German public. If Germany cannot conquer its internal struggles, that will mean trouble for the EU at large, especially as American leadership becomes increasingly sparse.

Protests erupted in France over a tax on diesel fuel that was part of an initiative to lower French dependence on fossil fuels. The social unrest was at a high level even by French standards, and police and protesters clashed in the streets. President Macron responded to the episode by reversing the fuel tax and offering tax relief to large portions of the French economy. Many fear that this will push the French deficit over the 3% maximum threshold set by the EU. If the French deficit continues to grow, this could provide the EU with a bit of a conundrum despite the recent settlement for now with Italy over budget deficit issues. Does it trade stability for consistency and hold the feet of the French government to the fire? The Italian and French situations present a unique dilemma that threatens turmoil within the EU and, when combined with Brexit, perhaps the European experiment as a whole.

Asia-Pacific

According to the National Bureau of Statistics, Chinese industrial companies’ profits declined 1.8% in November from a year earlier, down from a 3.6% rise in October. Total profits for December were 86 billion USD. The weak performance of the Chinese economy, primarily due to the US’ trade war, will cause slower Chinese economic growth throughout 2019. The decreasing growth will cause a weaker currency and will likely exacerbate the conflict between China and the US. We see little room for cooperation between the US and China which will further undermine international trade in 2019.

The Japanese stock market closed the year down. Japan has expanded its defense budget for the twelfth year in a row. A significant amount of this spending will go toward consuming American-produced hardware. The United States has been pressuring Japan to decrease the trade deficit between the two countries; thus, this increased consumption, combined with Japanese rhetoric on containing China, likely means that the US and Japan will move more closely together.

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