Best markets to trade in 2019

We have a look at the best markets to trade in 2019 and what’s in store for stock, forex, commodity and cryptocurrency markets as we enter the new year.

New York Stock Exchange Source: Bloomberg

What are the key markets to trade?

There is a wide variety of markets available to trade. Although they are intertwined with one another, they all have different characteristics and drivers that can provide unique opportunities for investors. These include:

  • Stock markets: where shares in publicly-listed companies are issued, bought and sold
  • Forex markets: where investors buy, sell, exchange and speculate on currencies such as the US dollar, British pound or the euro
  • Commodity markets: where raw commodities and primary products are traded, including the likes of oil, gold and agricultural goods
  • Cryptocurrency markets: where investors trade in and speculate on digital assets such as bitcoin or Ethereum
  • Bond markets: where debt securities are issued and traded, also known as the debt or credit market
  • Derivative markets: where trades in financial securities that obtain their value from underlying assets occur, allowing investors to speculate on a wider range of items such as interest rates or volatility in financial markets

What will happen to top trading markets in 2019?

'We’re talking about a slowdown in the pace of economic growth, not necessarily an end to the expansion,' - Kate Moore, chief equity strategist at BlackRock Investment Institute.

2018 was a mixed year for markets and it seems the best of the returns seen over the past seven to eight years are behind us. Discussions have turned to what 2019 will bring as markets adjust to sweeping changes that are reshaping the fundamentals of financial markets, all of which interlink with one another.

Trading in 2019: slower economic growth

The first is the slowdown in global economic growth. The US, spurred on by fiscal stimulus, has outperformed most of its international peers in 2018 but economic growth has started to show signs of a slowdown. Gross domestic product (GDP) rose 4.2% in the second quarter (Q2) and deaccelerated to 3.5% in Q3, and expectations for Q4 are closer to 3%. It’s a similar picture in the eurozone where growth has slowed from its peak late in 2017 of 2.5% to just 1.7% in Q3 of 2018. The UK had been one of the fastest growing economies in the G7 before it held the EU referendum in the middle of 2016 but, still unsure what Brexit will bring, is now one of the slowest growing economies in the group.

Trading in 2019: protectionist policies and trade wars

The second is the rise of protectionist policy and trade wars, with the US and China’s battle at the forefront of tensions. The dispute over trade has seen the pair retaliate by imposing tariff after tariff on each other’s goods which has placed pressure on both economies and aided the economic slowdown in growth. This, twinned with rising nationalism in key western markets like Germany, France and Italy, is threatening to unravel the international nature of business that has evolved over recent decades. Those trading globally or relying on cross-border supply chains have seen the board on which the game is played change dramatically this year with consequences that will last long beyond the next.

Europe’s headache with Brexit and Italy

Third is the growing uncertainty in Europe, with Brexit and the Italian budget crisis the main worry for markets. The nature of the UK’s departure from the EU is as unclear today as it was two years ago: questions over whether a deal will be hashed out, if the vital transition period that business needs will happen, or whether it leaves with no deal all remain unanswered. Meanwhile, Italy’s new Eurosceptic government is testing relations in the bloc even further after clashing with Brussels over its spending plans. Anti-establishment parties have also gained ground in Europe’s two most important countries, France and Germany, over the last ten years. Together, this paints an uncertain picture for Europe in 2019 and beyond.

Swathe of elections coming up in 2019

The fourth is how important upcoming elections will affect the tense geopolitical landscape, whether for better or worse. Management in Europe could be heading for a shake-up with European Parliament elections pencilled in for May 2019 with the potential to radically change the course of the bloc going forward. There are parliamentary, general or presidential elections next year in no less than 20 countries in 2019, including Romania, Croatia, Ukraine, Finland, Denmark, Portugal, Greece, Canada and Poland. US President Donald Trump will also start to gear-up for the 2020 vote where he will be looking to secure his second term as president.

2019 could see higher interest rates and pricier debt

The final trend is the rising cost of debt. Investors have become accustomed to record low interest rates but these are now starting to rise around the world, led by the US Federal Reserve (Fed). The Fed and the European Central Bank (ECB) both intend to hike rates in 2019 and the Bank of England (BoE) would have likely signalled a similar intent if it knew what the future held post-Brexit. This will weigh on both consumer and corporate debt, both of which have piled-up during the years of cheap lending.

It seems clear the bull market that has been raging for years is starting to wane and there is broad consensus that this year could be tougher than the last, with many starting to become comfortable discussing a possible recession emerging on the horizon. But is this the start of a bear market or simply a pause in global economic growth and markets?

Trading interest rates in 2019

Higher interest rates are an almost-certainty in 2019 but forthcoming hikes have been on the table for a while and much of this is thought to have already been priced-in by investors. The Fed has raised rates nine times since late 2015, most recently upping it to 2.5%, and has further hikes planned in 2019. But there was a strong response when it announced it only envisaged two rises next year rather than three, which has replaced the so-called ‘Santa rally’ that usually boosts stocks at the end of the year with a global sell-off in the US, Asia and Europe. It also placed pressure on the dollar, countering the gains it has made against other currencies in 2018.

Many had expected the Fed to ease off raising interest rates as the economic picture changed in the second half of 2018: growth slowed, stock markets gave back any gains they had made during the year so far, and inflation was running close to the central bank’s target. Yet, the Fed decided to plough ahead and make money more expensive.

The path has sparked fears among those worried that tougher business conditions will be exacerbated by more-expensive debt and clashes directly with Trump’s desired route. Prior to the most recent hike the president warned the Fed not to 'make yet another mistake' by raising rates with Trump eager not to make life more expensive for voters ahead of the 2020 election or to lose his self-proclaimed victory for leading stock markets higher and allowing the economy to blossom. Jerome Powell, the chair of the Fed appointed by Trump earlier this year, has said politics 'play no role whatsoever' in the bank’s plans.

This has also set the course for interest rates elsewhere. Rates in Europe have been held at 0% as we enter the new year but the ECB has said rate hikes are on the table after the summer of 2019 and introduced an end date for its €2.6 trillion bond purchase scheme. The BoE would have likely followed suit if it had any clarity over what is beyond March 29, 2019, when the UK is scheduled to leave the EU. The BoE is leaving rates at 0.75% until the complex matter of Brexit is resolved but has said hikes could happen latter in the year once the picture becomes clearer.

Trading bonds in 2019

The bond market would be a likely beneficiary of any decline in sentiment toward stocks. Generally, investors move money into bonds when they feel uncertain about stocks as a way of insulating themselves from any volatility or risk of sharp declines. However, this year has been made difficult by US Treasury yields surging higher while emerging debt markets have struggled because of the strong dollar and the impacts of the US-China trade war.

However, the theory that any bearish sentiment toward stocks in 2019 should result in investors flocking to bonds is complicated by several headwinds for debt markets in 2019. The most obvious is higher interest rates, which tend to place pressure on bond prices.

The fragile state of Italy’s finances also poses a problem for debt markets in Europe, specifically in the eurozone. Some believe the prolonged dispute over Italy’s budget will rumble on throughout 2019 and risks unearthing vulnerabilities in the wider eurozone area.

Additionally, corporate bond markets don’t look too rosy either. Years of cheap debt has seen businesses rack-up huge burdens on their balance sheets over recent years, much of which has been used to fund acquisitions to expand or the vast sums that they have returned to shareholders through dividends and buybacks. Now, with companies aware that higher interest rates are around the corner, most are racing to unwind their debt piles before they become more expensive.

The outlook has hit longer-term bonds harder than those with a shorter duration. Generally, shorter-term bonds yield less interest than longer-term ones but prices tend to remain more resilient when inflation and interest rates are heading higher. Emerging debt markets could also reverse the underperformance in 2018 if the dollar weakens or the trade war between the US and China subsides.

Trading forex markets in 2019

The pound, euro and currencies in emerging nations have all slid against the dollar in 2018 but the bullish sentiment behind the greenback is waning. Although the dollar is expected to remain relatively strong relative to other currencies in the G10 in 2019, including the euro thanks to the uncertainty spawning from the likes of Brexit and the Italian budget, many expect its rampant rise to wane.

Currencies in emerging markets such as Argentina, India and Turkey have all struggled in 2018 due to the strong dollar, higher interest rates and rising trade tensions. A softer dollar would be beneficial to emerging market currencies and any signs that US-China relations are improving would provide added relief. The knock to the dollar following the Fed’s most recent rate hike has fuelled thoughts that the dollar could have a tougher year in 2019, with many flocking to ‘safe haven’ currencies such as the Japanese yen.

Italy, the third-largest economy within the single currency, will be a lingering shadow over the euro in 2019. Paying attention to forecasts about the pound is pointless until Brexit pans-out. Although many are still trying to predict the future path of the pound (pointing toward plenty of potential down-and-upside) the range of estimates is vast – from $1.10 to $1.60 – and some have given up altogether with HSBC forecasting a flat rate of $1.30 over the next few years so it can return to its estimates once it has some solid information to go off.

Trading cryptocurrencies in 2019

Having plunged from the highs of late 2017, cryptocurrencies will be hoping to recover some of their heavy losses in the forthcoming year. The largest cryptocurrency, bitcoin, started its hefty decline from its peak valuation of almost $20,000 when it entered 2018. It is starting this year with a valuation four times as small at around $4000. Virtually all cryptocurrencies have lost considerable value in 2018, partly because the paradoxical relationship with regulation is far from being resolved, but there is reason for the market to be optimistic in 2019.

Governments may be far from embracing the world of cryptocurrencies but business knows the opportunities opening up. The number of global companies investing and experimenting with cryptocurrencies and, more so the blockchain, is increasing. Problem is, as much as crypto-enthusiasts don’t want the government’s blessing it is what they need to restore faith in a market that is still struggling to escape scandals. And again, while it is true cryptocurrencies were invented to circumnavigate regulation and big business, the support of both will be critical to the future of the market.

US regulators will reveal whether the attitude toward cryptocurrencies has warmed in early 2019. Having dashed several attempts to launch the first-ever major bitcoin ETF (exchange traded fund) in 2018 by the likes of BlackRock and VanEck, the Securities and Exchange Commission (SEC) is expected to rule on whether they can launch new bitcoin ETF’s in early 2019. Whether the government approves or denies the plans is significant. Approval would be seen as a sign of support from what have so far proven to be sceptical governments and introducing new trading instruments opens up the market to new investors and improves liquidity. Rejection, on the other hand, could prove to be another nail in the coffin for prices.

2019 will be another wild year for cryptocurrencies but ultimately just one of a journey that will evolve over decades. As the crypto-enthusiasts would say: HODL (hold on for dear life).

Trading stocks and shares in 2019

Globalisation is under threat, protectionism is on the rise and growth has passed its peak. This has been building for years but has been acutely felt in the second half of 2018. The impact of tariffs and signs that the US-China trade war is far from being resolved started to knock stocks in June and the tech sector that had been the driving force behind market gains began to reveal signs that it has reached peak growth and earnings. UK stocks haven’t been able to see beyond the horizon for some time and are haplessly trying to protect themselves from the possible outcome of Brexit.

The changing political landscape is threatening globalisation and the international supply chains that the world’s biggest stocks have become dependent upon. The trade war has done little but drive up the cost of goods for consumers and the cost of doing business for companies. For many, this has encouraged them to invest in more insulated domestic stocks, particularly ones that don’t rely on exporting their goods or importing vital supplies.

Others have started to head to more defensive stocks: ones that are the most unaffected when times get tough. These are vital industries where demand remains un-wavered by the state of the economy: such as healthcare or food. Other industries like telecoms and consumer staples also tend to weather storms better than others.

For many, the cost of business has coincided with a slowdown in growth and occurred on the cusp of higher interest rates which will add another problem in the form of more expensive debt. Those that haven’t balanced the books will pay the price in the coming years as interest rates begin to climb and the ability to refinance their debt becomes more difficult.

The higher cost of doing business, slower growth, pricier debt and tighter liquidity could weigh on stocks in 2019. Still, opportunities will remain ripe and those taking a longer-term view can rest assure investments in industries at the forefront of the next technological revolution remain a safe bet. This all makes alternatives in emerging markets more attractive, especially when combined with the brighter outlook for bond and forex markets.

Trading commodity markets in 2019

Commodity markets in 2018 continued to be dictated by pure supply and demand but geopolitical issues are emerging as an ever more powerful driver of commodity prices, much like they did in the 1970s during times like the Yom Kippur War-inspired oil crisis.

It has not been a strong end of the year for oil prices which, after hitting four-year highs in October, plummeted to the lowest level in over a year in December. The outlook is not supportive of oil prices: S&P predicts production will hit 100 million barrels of oil per day for the first-time ever in 2019 but many fear that there is too much supply for a global market that is slowing down. There is, however, plenty of potential supply problems in 2019.

The Organisation of Petroleum Exporting Countries (OPEC) has been trying to rally together with other major producers like Russia to manage supply to support prices but without ceding market share to the US, which now produces about 11 million barrels of oil per day. That also comes against the backdrop of US sanctions imposed on OPEC member Iran. Plus, the leader of OPEC, Saudi Arabia, is coming under increasing scrutiny from Western nations over the murder of journalist Jamal Khashoggi. US and Russia relations are also still frosty.

With US relations with the world’s other largest producers far from perfect its ability to export oil to huge consumer markets like China looked vital. Exports had reached a high of 450,000 barrels per day in June 2018 but have been in decline as the trade war takes its toll.

Oil has not been the only weapon wielded by governments in their international disputes. Metals have also been affected, with aluminium at the heart of Trump’s initial round of tariffs against China. Tariffs, coupled with sanctions on the world’s biggest producing firms in Russia, has pushed up prices of aluminium in 2018 and this could become a common theme for other metals in 2019 if trade tensions do not ease. Amid all this geopolitical uncertainty, safe-havens like gold could benefit in the year to come.

Technological advancements will also continue to drive demand for metals. The move toward electric cars, for example, continues to provide solid prospects for battery materials like lithium and cobalt.

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