2021 Economy predictions

2021 Economy predictions

Philippos Hadjizacharias

Managing Partner

PHS & Partners

15/12/2020

 

As we are currently in a reflation bounce, we expect further USD retraction in the near-term. Inflation peaked in the 1980s; since then, we have largely been in an environment of ‘disinflation.’ In the present (short-term) reflation bounce, the best performing asset classes are commodities, equities, credit, and G10 currencies. While U.S. elections are typically accompanied by a strong USD, in this historic election cycle, the USD depreciated. Equity markets experienced a minor correction last week, as investors wait in anticipation for the forthcoming stimulus injection to be approved by the Senate. Stocks are poised for a final melt-up, which will likely produce even ‘bubblier’ valuations. The circular bull market, which started almost 40 years ago, is approaching its end (an end which we anticipate in the next quarter).

The SPX is likely to reach upwards of 4,300 before the next pullback. We may even see higher rates in this cycle (despite the commonly held belief that higher rates necessitate lower equity prices). Inflation expectations may steepen the yield curve, producing a bullish growth signal, leading to increased capital allocation in EM and G10 ‘risk-on’ assets. The bullish move in base metals reinforces the prediction for a steepening in the yield curve. It is worth mentioning that expectations for base metals in 2021 are very promising. Theory suggests that Gold should collapse because real rates are moving higher (hence investors would prefer Treasury yields). The reality, however, is that higher inflation expectations will provide a pretext for a further rally in precious metals. If our predictions are accurate, this quarter’s reflation bounce cannot extend much further after Q1 2021, meaning that Gold and commodities may rally further. Stagflation at a later stage, is a bullish scenario for Gold.

Going into mid-2021, we expect a serious deflationary correction, potentially on par (or worse) than what we experienced in March 2020. Nonetheless, in the short-term the USD will likely be sold against everything: G10 currencies, commodities (including energy), and precious metals will all appreciate in the immediate term. The Commitment of Traders (COT Report) confirms this, as institutional traders continue to sell USD. The Dollar Strength Index (DXY) could reach the 85-88 region in the coming weeks/months. However, around these levels, we would not be short the USD. The coming year, will feature a strong comeback of the USD, reversing the price action of 2020. Given the dependence of global markets upon the reserve currency, we foresee a significant pullback in ‘risk-on’ assets.

Since Trump has left the White House, the question remains: what will be the ‘fly-in-the-soup’ event of 2021?

• A sovereign credit and currency crisis.
• A crisis in Chinese property, resulting from China’s policy tightening (see CNH).
• Political paralysis in the Eurozone, arising from German elections in September.
• The mutation of the virus, and the ineffectiveness of the vaccine.
• The rejection of the vaccine, due to its significant side effects.
• Failure of the EU Recovery Fund.
• Mass refusal to vaccinate.
• Technology bubble burst.
• End of Central Bank stimulus.
• Stagflation appears earlier than expected.
• Hard Brexit and its ramifications.
• An escalation of tensions with Iran.
• Higher corporate taxes pressured by the OECD.
• A Scottish Independence referendum.
• An acceleration of France’s 2022 elections.
• Resurgence of North Korean aggression following Biden’s inauguration.

Until the time that one or more of these events are reached, these are our expectations for the final melt-up:

SPX $4200-$4,500

EURUSD 1.24-1.27

GBPUSD 1.40-1.42

USDCAD 1.13-1.15

AUDUSD 0.78-0.80

WTI $50-$55

Gold $2,200-$2,500

Silver $30-$35

10y US yields 1.10%-1.30%

The above information cannot be treated as an advise, however if you want more information and/or our full report, you should contact us directly.