2019 was a banner year for riskier assets. The US benchmark S&P 500 index soared nearly 29%, after falling approximately 6% in 2018. The Nasdaq was the best performing of the major US indices rallying a robust 35%. The German DAX notched up gains of 24% for 2019, while the Nikkei rallied approximately 18% for the year.
The year was mark with historic events. The US-Chinese trade skirmish blossomed into a full-blown war, while President Donald Trump became the 3rd US president to be impeached by the US House of Representatives. After several votes to push through a Brexit, the UK went to the polls for a General election. The Federal Reserve started to decrease interest rates after increasing them in December of 2018. Oil prices started to climb during the second half of 2019, following an attack on the largest Saudi Arabian oil field. Gold prices were rangebound as geopolitical risks remained on the sidelines.
Trade War
The markets focused on trade during 2019, as the US-Chinese trade tiff, bloomed into a full-blown trade war. The theme focused on President Donald Trump’s America first protectionism stance, which led to several rounds of trade tariffs. The increase in cost for American companies led to a rethinking of supply chains to purchase intermediate goods and led the Chinese to find other sources of grains. Despite the lack of demand for soybeans from Chinese buyers, prices remained nearly unchanged in 2019, after falling approximately 10% since the introduction of tariffs in 2017.
President Trump and his negotiators worked on a replacement for the NAFTA agreement, which tied together country block that includes the United States, Canada and Mexico into something close to a single market for goods. Before the end of 2019 the Trump administration’s negotiators got their reworked replacement for NAFTA, which is called the USMCA. 2019 ends with far higher tariffs on Chinese imports to America, and China was able to find new export markets with surprising success. The year also ended with the lowest volatility seen in US equities in years, despite hundreds of tweets sent by the President announcing new tariffs on China and Europe. The Trump administration also used a heavy hand to block new appointments to the World Trade Organization which finished the year without a functioning appellate body. Future trade disputes will go through hearings of first instance, and then countries will be back to bilateralism.
Phase One Trade Deal
The trade war eventually produced an agreement to move forward and reduce tensions between the worlds two largest superpowers. Unfortunately, by ensnaring the agricultural sector as a part of a trade war that was about how the Chinese deal with intellectual property issues, the subsequent onslaught between Beijing and Washington, made all matters to be worse for the farm sector. In the year that came before the trade war, US farm exports to China totaled in $19.5 billions.
By the end of the next year, they went down by 53% to only $9.2 billion. Some of the products that are very reliant for trading with China took big full. Some of the American agriculture sector indicators of health have also been sufering from negatively trending. Bankruptcy, for example , filings for farms have gone worse also, and farm debt is will for sure reach a new record of highness. The US announced in December that the US and China would sign a “step one” trade deal on January 15, but Chinese never confirmed the date.
US Trade Deficit Declines
The US trade deficit narrowed more than expected in November, helped by Chinese purchases of US goods. The shortfall in goods and services declined to $43.09 billion for the month, below the $43.6 estimate. That represented the lowest deficit since October 2016. That was down sharply from $46.9 billion in October, which was revised lower from an initially reported $47.2 billion. The deficit with China decreased $2.2 billion in November to $25.6 billion owing to a $1.4 billion increase in exports and an $800 million decline in imports.
Falling US Rates in 2019
2019 was also marked by falling US rates and a rising US dollar as traders asked the question about what is currency trading. The Federal Reserve ending 2018 with an interest rate hike, that pushed the fed fund borrowing rate up to 2.25%. During the year, they lower the borrowing rate in which banks lend to one another 3-times down to a range between 1.50% and 1.75%.
The reasoning was due to the uncertainties surrounding the US-China trade war. While US data remain upbeat, and jobs growth surged to all-time highs, rates continued to fall, as uncertainty remained prevalent. The year ended with the Fed cutting rates one last time but stating that the bar to reduce or increase rates had become a lot higher. Despite US rates moving lower, the dollar continued to climb for most of 2019, but finished the year nearly unchanged as the greenback fell during the Q4 of 2019.