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Protrader – December 2018 Market Wrap

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Macro Concerns continue to plague the Market
Down 16

The month of December saw a continuation of uncertainty primarily around macro International factors. Without any positive domestic stimulus, the market limped along, being buffeted by international factors, with the market never being able to surpass the close of 7th December, and on the 21st, closing on a two year low. A mild festive rally followed resulting in a close at 5651 with a loss of 16 points for the month.

The potential expansion of the US/Sino trade war, with the Huawei CFO, Meng Wanzhou arrest viewed as part of this war, continued to be the primary dampening factor, however other issues such as Brexit Anxiety and expected insipid world economic growth in 2019, also contributed to the overall malaise.


  • RBA kept cash rate the same.
  • GDP rose 2.8%
  • Retail Spending data beat expectations.
  • Australian Jobless rate edged up 5.1%
  • Weaker than expected Chinese trade data.
  • The Japanese economy contracted most in 4 yrs.

For the year, the All Ords started 2018 at 6,230, peaking at 6,481 in August, before falling to 5.709, an 8.4% fall for 12 months, and 11.9% fall in only the last 5 months.

DOMESTIC ISSUES: A ticking time bomb?

What has been of particular interest over the last 6 months has been the banking sector, which has historically been a bulwark of the Australian market, providing support through periods of external uncertainty. The unusual circumstances surrounding the banking sector resulted in the OECD to actually issue a report regarding Australia’s household debt.




The concern that has been raised is two-fold, both the regulatory cultural shift that has emanated from the Royal Commission, but also the 900,000 households rolling over to a principle & Interest loan, from just Interest loans in Jan/feb 2019.

The regulatory cultural shift saw APRA (Australian Prudential Regulatory Authority) take virtually unheard of action against IOOF Director Chris Kelaher and four senior executives resulting in $900 m being wiped off the IOOF market value in a few hours on December 7th. This followed by NAB CEO Andrew Thorburn’s former chief of staff (Rosemary Rogers) house being raided by Federal police as part of a corruption/bribery investigation, has sent shudders throughout the previous Teflon like banking sector. For the first time in living memory with an expanded budget and clear political mandate supporting regulatory authorities such as ASIC and APRA, the banking sector is legitimately scared.

With the final Royal commission findings and loan transition judgment day baring down upon us, no one really knows where or what this will lead to, and until these two massive clouds pass, it is likely that the banking sector will still remain extremely volatile.

DOW JONES IND AVG 25,779 – 23,328 : Down 2451 Points



December experienced an increase in the volatility from the previous month with over a 4200 point divergence from peak to trough for the month, and at times saw over 1000 fluctuations in a single day, such as on the 26th, followed by a 900 point day on the 27th. The Dow down 5.6%, S&P 500 down 6.6%, and the NASDAQ dropping 3.9% for the year, in many ways, December was an embodiment of 2018.

Apart from the ongoing concerns surrounding domestic political issues, such as the Govt shutdown, and International concerns around the ongoing, possibly expanding trade war saga and Brexit, the biggest cloud that rose on the horizon was related to US yield curves.

What is an inverted yield curve?

An inverted yield curve is an interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. … An inverse yield curve predicts lower interest rates in the future as longer-term bonds are being demanded, sending the yields down.

Basically, investors feel they will get a better deal now, than in the future, when investing in bonds. What is of greater concern to the market, is that 2 yr bonds yield more than 10 yr bond yields, this event has proceeded a recession on every occasion since WW2.

When juxtapositioning this with the December Fed Reserve Interest rate rise, an investor can now get a 5yr term deposit at 3.5%, basically risk-free. Why would you keep your money in the market?

All these elements combined for the S&P to have the worst performance since the great depression in 1931.

Key Developments in the Month of December

  • Fed Reserve raised interest rates by, 05% to -2.5%
    ISM Manufacturiexpectationse expectations
    US unemployment rate 3.7% for the second straight month.
    PPI (Producer Price Index) beat market expectations
    Building Permits jumped 5%
    China dropped US Car import tariffs from 40% to15%

OIL STOCK UPDATES: The waiting game begins

WTI Crude – Dropped $5.60 from $50.93 – $45.33

The world Oil market possibly fell for one of the greatest slight of hands in modern times, by US President Donald Trump. After several months of publicly stating that Iranian Oil exports would be cut to zero (presently at the lowest level since 2016), OPEC ramped up production to record levels to fill the expected shortfall, only for the US to simultaneously achieve record production levels whilst providing sanction waivers to 8 of Iranian Oil markets. Couple this with general trade war and 2019 world economic growth concerns resulted in an oversupply of Oil production versus demand, and thus the Oil price hitting an 18 month low of $42.53 in December.

However, an 8% rebound occurred on the 26th of December, shortly after, with the general consensus that the market had now factored in all negative news and was oversold.

The oil market like a large ship takes a long time to turn around, we have already seen OPEC announce production cuts of 1.2 mbpd.  In addition, the Iranian threat is still very much alive, as we saw when Iranian President Hassam Rouhani threatened to close the Straits of Hormuz if the US tried to physically block future Oil exports from Iran. As can be seen from the pictogram below that would create a massive supply shock sending the oil price up dramatically.

The US Sanction waivers are expected to cease around April, and Iranian production /exports are already at there lowest since Jan 2016.

Considering the Iranian economy and entire political structure/system is virtually totally reliant upon Oil exports, at some stage, somethings got to give.

Therefore it’s now simply a waiting game for OPEC production to decrease, US/Sino trade war to recede, and the Iranian sanction waivers to expire to see aggressive price movements to return to Oil.

Key Oil Price Influences

  • Qatar announced leaving OPEC.
  • Iraq achieved record production 4.76 mbpd
  • Libyan Oil facilities were taken over by rebels.
  • Russia hit record Oil production of 11.42 mbpd.
  • US Shale fields pumped record 8 mbpd
  • US total production 116 mbpd

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Sam ProTrader

Sam ProTrader

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