As we close in on year-end 2017, it’s worth looking ahead at some of the potential pitfalls that could impact markets in the new year.
Right at the very top of the list? The tightening credit conditions around the world.
Back in September I briefed you about “the end of easy money” globally. And how it could be a game-changer for stocks, bonds and currency markets.
As a refresher, the chart below shows the combined (bloated) balance sheets of the major central banks after years of quantitative easing …
Eleven trillion dollars later … you can see clearly that central bank balance sheets have peaked, and will soon begin to decline.
The Fed is already actively engaged in running off its bloated balance sheet. This began in October, and is set to accelerate in 2018. Other central banks will soon follow the Fed’s lead.
Global central banks are shifting from being the buyers of last resort for all sorts of toxic debt and equities … to being sellers of those assets.
That means tighter credit conditions, plain and simple. And we’re already beginning to see the evidence:
In the U.S., junk bond spreads have widened significantly since October. Meanwhile the Treasury yield curve has flattened the most since the Great Recession 10 years ago. See below …
This is a classic warning sign for investors to watch out for tightening credit conditions … slower growth … and potentially a recession ahead in 2018!
Among Goldman Sachs’ “top conviction trades” for 2018 is shorting 10-year U.S. Treasury bonds …
Goldman sees yields on the 10-year note breaking above 3% next year. That’s because they see the Fed hiking interest rates four more times in the New Year, which is way more hawkish than markets expect.
Meanwhile, halfway around the world in China, government bond prices have tumbled in recent months. Yields there are spiking to a three-year high of 4%, as liquidity in China’s financial system tightens.
Credit spreads are also widening on Chinese corporate debt, the biggest increase since March 2015. Keep in mind that the credit crunch back in 2015 triggered a crash of 60% in China’s stock market!
These developments aren’t having an immediate negative impact on U.S. markets, which remain in rally mode into the holidays. But it’s worth keeping a watchful eye on this as 2018 fast approaches.
If global credit conditions keep tightening, it will surely result in much more volatility for markets.
Portfolio Update:
Stocks typically move higher at this time of year, and other markets slow down on diminishing trading volume.
That means now is the time to trim a few positions and raise cash for new opportunities in 2018.
Here are three moves to make right now …
The dollar rally appears to have run its course, according to the cycles. So, it makes sense to close out your ProShares UltraShort Euro (EUO) position at roughly breakeven.
We may see the U.S. dollar rally extend higher in 2018, fueled by hawkish Fed policy. If so, we can look to re-enter this trade in the new year.
Also, stocks continue to defy gravity. And it makes no sense to buck that uptrend this time of year.
It’s looking more likely that we’re seeing a cycle inversion in the forecast for a market decline, with stocks rising rather than falling into January.
If that’s the case, close out your ProShares UltraShort Dow30 (DXD) and ProShares UltraShort S&P500 (SDS) shares now to raise additional cash. But continue to hold ProShares UltraShort QQQ (QID). That’s because the Nasdaq is by far the most overbought index, and the most vulnerable to a sharp correction.
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Here’s what to do right away: 1. Sell to Close ALL my shares of the ProShares UltraShort Euro ETF, symbol EUO, at the market. 2. Sell to Close ALL my shares of the ProShares UltraShort Dow 30 ETF, symbol DXD, at the market. 3. Sell to Close ALL my shares of the ProShares UltraShort S&P 500 ETF, symbol SDS, at the market. |
Place these trades right with your broker ASAP, continue to hold all other positions and stay tuned for more updates.
Good investing,
Mike
