Markets are not settling down very soon. Markets are going into new bedlam and volatility. Global economy is running on borrowed future growth rate through QE. Central banks in advanced economies [FED, ECB, BoE and BoJ ] have distorted asset prices leading to abnormal valuations which are not based on reality. Currency war creates tail-end risk for few asset classes. Currency risk goes deeper in the equity and bond markets as most investors are caught off-guard. In the last 17 months, we have observed an asset flip. Bonds have become equities and equities have become bonds. Investors are chasing prices not yield which is contrary to the critical reasoning. US dollar will stay weaker in 2020 due to few premises:
1. FED is going to lower rates before Nov 3-2020 election. 2 or 3 rate cuts are possible.
2. Political bickering at the top makes a lot of bedlam in the market
3. Trade war creates more uncertainty in 2020. Phase 1 deal is done but
4. Treasury would borrow money from the market. It has borrowed $817 billion in the last 137 days
5. FED has taken over the REPO market and injected $3 trillion from Sept 16 to Dec 15-2019.
Dollar Level Against Various Currencies In 2020
Euro ——1.17 to 1.19
Pound—–1.35 to 1.39
Canadian $—1.27 to 1.30
Chinese yuan –6.98 to 7.07
Swiss Franc —0.90 to 0.97
Aussie dollar —0.67 to 0.73
Japanese yen —95 to 102
Malaysian Ringitt ——3.97 to 4.30
Source: Economist latest issue November 17-23/19, UBS –Year Ahead report 2020, WSJ, Financial Times, IQI Global market intelligence report.
Trade war: mistrust remains between both sides.
It’s a temporary truce and uncertainty looms as both sides want to get into the driving seat. Phase 1 is to show the world that all is fine and good. However, there is lot of mistrust between both players. In my opinion, China is winning the trade escapade and USA is on the losing side. China has got lot of room to manoruvre in terms of fiscal and monetary policy.
BREXIT RISK IS GETTING ON THE LOWER END. Brexit shenanigans is over and investors are back in the ring. Boris has done his magic again. Europe is feeling the pressure now. There will be a lot of bedlam in the global financial markets in 2020.
Repo Market Uncertainty: Liquidity Crisis
FED has injected $3 trillion from Sept 16 to Dec 15 and is expected to inject more capital of $2.9 trillion from Dec 16 to Jan 18-2020, thus controlling the banking industry. FED has lost control of the market and is getting panicky now. Investors are finally getting nervous. Markets are in a mood now and can expect sharp turns in the equity landscape.
Powell is under a lot of pressure from White House to cut rates. It is expected that FED will cut interest rates to 1% or even lower before November 3-20 election date. QE4 will get more vigorous in the market. WSJ dated Dec 10-19 has shared the chaotic scenario.
Europe: Stretched To Her Limits:
Austerity and corruption in Europe have become a huge drag on the economic outlook of Europe. Negative interest rates and high taxes on technology companies are not helping EU-28 economic block to attract talent and investment. Europe’s economy would become one third of the global economy in the next 2-3 years. Simply put, Europe is irrelevant to the global markets.
It boils down to economics everywhere, when people don’t have food, don’t have jobs, don’t have sense of purpose to their lives, it’s an excruciating agony. Social unrest is a live case study of this scenario. People only fight when stomachs are empty
Gold outlook—–shines in the market.
Gold remains in the asset portfolio of many investors in 2020. Gold will outperform other precious metals in 2020. Gold will be trading between $1500 and $1700/ oz next year taking into account many exogenous variables like Central bank buying, QE4 and negative interest rates, Brexit non-clarity, US election, topsy-turvy market performance and struggling Europe. Gold is the only asset class with zero counterparty risk. Current bull market in Gold has commenced which is third time in the yellow metal history. If we check history and can get guidance from there
YEAR GOLD PRICE IN DOLLARS /OZ % INCREASE
1971-80 $35 – $850 2328% First bull run
2001-11 $257- $1923 648% Second bull run
2015-To-date $1089- $1477 36% Third bull run commenced
Source: Economist, market intelligence report, WSJ, FT, University of Chicago Library, USA
OIL MARKET ——GEO-POLITCAL RISK BOLSTERS THE UPSURGE
Oil market will remain busy and in the mainstream media reporting due to possible production cuts coming in the energy market by June 2020. We foresee oil prices to be touching around $62 to $90/barrel next year. Premises are simple
1. Dollar to stay weaker
2. Geo political risk
3. Production cuts tantamount to 1-2 million barrel per day
4. Bankruptcies looming.
Remember the notes in 2020: EASY TO RECALL NEXT YEAR.
1. Long on stocks and commodities,
2. Trump will win as impeachment helps him to solidify his position.
3. Recession is coming in 21,
4. 5G, EV and AI take all the major CAPEX Investment.
5. Oil is above $75+ / barrel
6. Dollar will depreciate by 3-4% as FED lowers the discount rate under Trump’s pressure.
7. Pound is the currency for next year. Aussie Dollar and Canadian dollar get the limelight as well.
8. Geo Political risk goes out of the roof and impacting the markets.
9. Social unrest has started in 43 countries globally due to income disparity and skillset gap.
NUTSHELL OF ECONOMIC LANDSCAPE:
It boils down to economics everywhere, when people don’t have food, don’t have jobs, don’t have sense of purpose to their lives, it’s an excruciating agony. Social unrest is a live case study of this scenario. People only fight when stomachs are empty. Otherwise, everyone is happy. Fasten your seat belts and improve your skillset as global economy turns volatile and unpredictable.
The writer is Chief Economist, IQI Global