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WALL STREET INSIGHT

Growing fears of bubbles after 2017's frothy exuberance

Speculation spreading to cryptocurrencies amid signs of crumbling in major growth engines

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During swings in bitcoin prices last week, the prices of Overstock.com and other companies that have risen on the coat tails of bitcoin fell.

US stocks finished slightly lower on the week but recorded one of their biggest annual gains in living memory as the froth of speculative activity spread from the stock market to alternative assets such as bitcoin.

Some of the sectors that had gained the most after the election of US President Donald Trump, including financials and technology, finished the year with a selloff.

Rate-sensitive sectors that fell out of favour this year, including utilities and telecoms, rebounded last week.

Financials suffered and utilities thrived because of tempered expectations that the US would raise interest rates aggressively while the rest of the world lags behind.

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Some Federal Reserve officials are warning against rate rises and incoming chairman Jerome Powell may be less "hawkish" than outgoing chairwoman Janet Yellen.

Meanwhile, the European Central Bank has hinted that it will move away from a rate-cutting policy towards hikes.

There's also scepticism that the Trump administration would follow up on its success on the tax-cut bill with another victory on a planned infrastructure law. "A basket of infrastructure beneļ¬ciaries was among the strongest performers following the election in late 2016, but has since given back most of those gains, and moved little in the past month," analysts at brokerage Goldman Sachs said in a research note.

Some of the biggest beneficiaries of infrastructure spending such as construction-machinery maker Caterpillar and copper miner Freeport McMoRan sold off last week after nearly doubling during 2017.

Commodities investors are getting more bullish as 2017 ended a four-year commodities crash.

The price of oil, which traded below US$30 a barrel in late-2016, finished 2017 at US$60 a barrel.

The commodities crash was triggered in 2012 when Saudi Arabia attempted to shake out competitors on US shale-oil fields, shocking the world with its decision to open up the spigots.

That exposed gluts in oil, copper, zinc and other metals accrued during years of rising commodities prices.

American companies are trucking out their giant drilling rigs to the Permian Basin in Texas and elsewhere.

Oil price remains subject to the tug of war between Saudi Arabia, Russia and members of the Organization of the Petroleum Exporting Countries (Opec) cartel on one side and American shale producers on the other.

Phil Flynn, senior market analyst at Price Futures Group, maintains that the global oil market is now in a state of supply shortage after years of excess oil sitting in tankers and storage farms worldwide.

Copper prices finished at a three-year high, completing a sixteen-session winning streak on the New York Mercantile Exchange that was the longest on record.

There are also signs of crumbling in the major growth engines. Apple shares finished the year on a weak note amid concerns that the iPhone X would not command the kind of "Supercycle" of smartphone upgrades that analysts at brokerage Morgan Stanley and elsewhere had anticipated.

There's an entire "ecosystem" of companies that feed off sales of components and service for Apple's phones.

If Apple stumbles, so will the tech sector. Like Apple, Amazon.com, Facebook, Netflix and Google parent Alphabet are "priced for perfection".

With huge companies trading at 17 times expected earnings and more, any misstep can be magnified.

The speculative rush into bitcoin could also be a sign of lurking dangers. The wildest swings often occur at the tail end of a bull market.

The run-up in the prices of cryptocurrencies is almost unprecedented, taking the asset class from less than US$40 billion at the start of the year to more than US$500 billion at the end.

"This is going to become the biggest bubble in history," said Lorenzo Di Mattia, manager of hedge fund Sibilla Global Fund. At the current pace, cryptocurrencies would be worth trillions of dollars in 2018.

"It could be slower or stop earlier . . . or it could be faster and stop at an even higher market cap. Who knows? One thing is for sure now. It will all crash."

Chris Harvey, chief equity strategist at Wells Fargo Securities, warned last week on CNBC television, that a crash in bitcoin could spill over into the broader stock market.

Indeed, during swings in bitcoin prices last week, the prices of Overstock.com and other companies that have risen on the coat tails of bitcoin fell on bitcoin's heels.

The Standard & Poor's 500 has not had a 3 per cent correction in more than a year, the longest such run on record, according to analysts at brokerage LPL Financial.

Nevertheless, the LPL Financial analysts say the stock market could fare well next year as long as economic growth data keeps improving.

The first major bit of economic data, the December jobs report, will come on Friday. It's likely to show that slightly fewer than 200,000 people were added to payrolls for the month.

That's a respectable tally but may not be enough to sustain Wall Street bullishness about the economy.

The year 2017, an ebullient one for markets, finished on something of a somber note. It remains to be seen which of the moods will carry through into 2018.