It has been a bumpy start to 2018.

In our Q1 outlook we predicted 2018 would be a year of changes, but we did not expect those changes to come so fast or be so dramatic.

US Market

U.S. stocks kicked off 2018 with the best January performance in three decades, followed by a correction of more than 10% in February.

Volatility that month spiked sharply, with the VIX reaching 50 for the first time since August 2015.

Meanwhile, U.S. bonds ended a 30-year bear market, with 10-year treasury yields climbing 22% to trade above 2.9% before dropping towards 2.75% by the end of March.

Headlines focusing on trade protectionism, U.S. policy uncertainty, inflation risks, monetary policy normalization, and the return of volatility rattled the markets in Q1, ending 2017’s stable market environment.

These developments will continue to significantly influence financial markets and keep volatility at elevated levels in Q2.

Stock Market

The latest risk for financial markets emerged during the last trading week of March, when Facebook, Alphabet and other so-called ‘FANG Stocks’ suffered their worst on day-decline as a group on Tuesday, March 27th.

Fears over heightened regulation hurt a sector that had previously driven the U.S. markets to record highs.

Investors are now likely to question whether the recent selloff is a good opportunity to buy the dips, or whether it suggests the last driver of the bull market is being removed.

It remains unclear how the business model of social media groups will change following Facebook’s scandal and renewed interest from regulators.

The fate of Amazon is also uncertain after Trump talked about using an antitrust law to “go after” the company.

Meanwhile, recent fatalities involving a Tesla car on autopilot and a self-driving Uber car may lead to a significant slowdown in this sector.

So, there’s a lot to worry about in the Tech space and valuing the impact of recent developments is by no means easy.

From a broader market perspective, some investors are worried by the shape of the U.S. Treasury yield curve.

The 10-year/2-year spread fell below 50 basis points in the final trading week of Q1.

That was the narrowest spread since October 2007, when stock markets peaked and the global economy entered into a deep recession a few months later.

The yield curve has a general tendency to signal the market’s expectation of an upcoming recession or general downturn in growth but, so far, I’m not really worried about a recession.

The yield curve has been distorted by the Federal Reserve and other Central Banks’ monetary policies which lifted short term interest rates while keeping a cap on the longer run maturities.

In the previous five recessions, it took nearly a year for the curve to invert once it hit 50 basis points. Once it had inverted, it took about 20 more months until a recession started.

Forex Market

In FX, it was no surprise that the Yen was the best performing currency in Q1.

The safe haven currency rallied 5.7% against the dollar, and more than 7% against high beta Aussie.

Interestingly though, the U.S. Dollar did not benefit from the steep fall in equities, the hike in rates, or the rise in volatility.

Both the Pound and Euro gained against the Dollar by 2.7% and 3.7% respectively.

Cryptocurrency Market

Cryptocurrencies have lost a staggering amount of value since the beginning of the year.

The market cap fell more than 70% from its peak levels, with Bitcoin tumbling to a low of $5,920 in February.

Regulatory uncertainty, social media crackdown, and exchange closures were all blamed for the sharp selloff.

Here’s FXTM’s outlook for 2018.

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