The year of 2019 is drawing to an end with a sustained rally across global equity markets, in sharp contrast to the end of 2018. Sentiment has improved thanks to signs of appeasement in a number of issues the world has yet to overcome. Uncertainty remains and themes like trade tensions and Brexit will be key drivers in market volatility in the months to come. Here are some major market shakers we will need to look out for.
Global economic growth
According to the IMF global growth is projected to improve to 3.5% in 2020 versus 3.2% in 2019. Investment and consumer spending may remain weaker-than-anticipated as companies and households hold back on long-term commitment. International trade is likely to stay sluggish unless major commercial partners resolve their differences.
Trade disputes between the U.S. and its key partners e.g. the European Union and China will lead global sentiment for another year. We expect protracted negotiations for the next six months. Even though both sides have shown their willingness to progress toward an agreement, talks could collapse at any time. The only relief markets can get is that the rhetoric has become less aggressive, which raises hope that a settlement is not just a fantasy.
We expect periods of lengthy negotiations as the U.S. and China proceed to an agreement phase by phase. As a result global markets may see heightened volatility. Progressive arrangements along with positive signals from both sides could enhance the risk-on mode markets have been experiencing lately. Stock indices would reach historical highs and demand for commodities could see a gradual recovery, a bullish case for oil and related currencies such as the Canadian dollar and the Norwegian Krone. However, a stall in the talks would impede recovery in risk assets in favour of safe havens like gold and the Japanese yen.
Momentum in global economy would stay soft in the first half of the year. With muted demand and subdued growth, major economies have already switched to accommodative monetary policies. Next year central banks will have the challenging task of lifting core inflation which is below target in the US, the EU and most advanced economies. More drastic monetary and fiscal measures could be rolled out should data continue to point to a downturn.
Risk of global recession will remain the central fear factor as long as tariff hikes go on. Slowdown in the EU and China could become more noticeable as a combination of weaker industrial activity and higher duties. Meanwhile, reliance on emerging economies to lead global growth has become brittle in the face of slowing trade. Manufacturing activity in developing countries would remain under pressure due to weaker trade prospects and lower spending in major economies. The effectiveness of monetary easing will be conditional to how trade talks unfold.
The U.S. Federal reserve is expected to keep interest rates low for 2020, which is likely to be mirrored by other central banks. This cash-rich environment would continue to fuel the stock market. As growth picks up in the second half of the year, better sentiment could give a boost to the Australian and New Zealand dollars and emerging currencies at the expense of the yen and the Swiss franc.
The Brexit will certainly redefine the nature of the UK’s relationship with its largest trading partner. The divorce will be up for another episode after the December election. Whoever emerges victorious, the election may have the merit of abating the political uncertainty. However, households and businesses would remain pessimistic until a deal passes through the parliament.
A possible scenario is that of a prolonged delay. Growth would stay below 1% for 2020 and the Bank of England may take proactive action and slash the rate, reversing its tightening course from November 2017. On the bright side, the UK will keep all the benefits of unrestricted access to EU markets, effectively providing support to the economy for as long as it is possible.
The danger of a no-deal still looms. An abrupt withdrawal could leave a mark on the UK economy and push the pound sterling over an abyss. Depressed consumer and business confidence would trigger slump in private consumption and investment.
The British pound might be the mover and shaker in 2020, spikes would come and go as political news shift sentiment. A soft Brexit deal could propel the currency to the pre-referendum level just as a no-deal may prove to be disastrous. Volatility will certainly keep market participants on their toes.
U.S. presidential election
Assuming that Mr Trump survives the current impeachment inquiry, the year of 2020 will be closing with a bang as he faces the challenge of re-election. Needless to say controversies leading up to the ballot will generate high volatility next November.
Trade wars will be the centrepiece of President Trump’s foreign policy as he seeks to appeal to the rural and industrial America. Maintaining a tough stance on China would attract voters in key states like Ohio, Michigan and Pennsylvania. The prospect of China agreeing to large agricultural purchases would help the incumbent’s farm belt constituency, and contribute to securing a second mandate. This is the reason why the U.S. trade policy and the election have become inextricably intertwined. As a matter of fact, the result will have a direct impact on the country’s foreign policy. We would anticipate a continuation of a firm stance should the Trump administration stay in place. Surprise and volatility would come in case of a Democrat victory, in which the market may see a reversal of current measures or at least a softened rhetoric.
U.S. stock markets and the U.S. dollar would be the biggest movers after the result. A Democrat win could be beneficial to the major indices if a de-escalation of the trade wars is on their agenda. On the flip side investors may shun the greenback in favour of the euro and emerging currencies as trade prospects brightens.
Hopes are high that 2020 will bring more certainty to a number of thorny issues. Expectations of a happy ending in the Brexit drama could drive the pound’s recovery. In the meantime, the progress in the US-China trade showdown may be slow and tactical enough to hold the key to the U.S. election at the very end of the year. These high-volatility events in a context of global monetary easing will create ample opportunities for both short and medium-term investors.