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Intro
2020 started off being focused on China Trade, Brexit, Federal Reserve rate changes, Dollar squeeze, and emerging market decline. The global infrastructure was already crippled as a result of foreign debt defaults, domestic debt crisis, civil revolutions, trade wars, brexit, and late cycle trends. This was all sped up by the onset of the pandemic lockdowns.
- Focus quickly shifted to global shutdowns from pandemic as supply and demand hit 0, oil shock came in, and dollar crisis ensued.
- Basically central banks around the world had one of 4 ways to deal with the crisis, and, in most cases, they used all four. These include
Q.E. (Buying securities in the open market to flood the system with cash to keep it stimulated)
Money Printing activities (more in our previous articles)
Discount Rate (Interest rate that the Fed charges to member banks)
Reserve requirements (Forcing member banks to hold a certain dollar amount with them to make sure they’re solvent).
Main Point
Long story short the Fed printed trillions of dollars while the Euro nations and Japan did the same with their currencies. The Fed then made the cost of borrowing that money 0 while the ECB and BOJ went negative. This caused the price of equities, commodities, cryptocurrencies, and other assets to skyrocket in 2020.
We believe this trend of stimulus being provided by both central banks and Governments will continue in 2021. In order to stop future recessions and depressions the central banks will need to provide more aggressive support to the economy; which includes flooding the market with cheap debt. This means we can expect a continuation of this market momentum as long as the prospect of stimulus is high.
2020 Timeline
Before we look at where we're headed, lets review the big market events from last year as noted in our previous articles:
January: China Trade Run-off, Brexit, U.S. Election Campaigns
February: Trump Trade policy
March: Corona Crash, Equity crash, dollar spike (Squeeze), March 15 Fed started QE, Fed cut rates to 0.
April: Oil Shock, Stock Market Bottom, PPP program announced, Fiscal stimulus announced for April.
May: Oil recovery, Market recovery, Gold recovery,
June: Market recovery sparks question about Federal reserve intervention,
July: Bitcoin first pump
August; U.S. Dollar gridlock, bears still striking
September: The S&P 500 fell 9.6% in a three-week span
October: U.S. Election Prep, stimulus gridlock
November: Election outcome, contested election, stimulus gridlock
December: New stimulus announced, vaccine announced
January Biden announced winner with Blue sweep
Market Cycle 2021
- A common misconception is that the new year brings portfolio rebalancing from the central banks and other key institutions. What we are seeing lately is the rebalancing process that takes place year-end is being dragged out over several months. December and January are key indications of where money is likely to flow to in 2021 if we start to see money leave some overvalued markets and end up in discounted markets. Due to the Federal Reserve's dovish policy structure we can see a continuation of major trends from 2020. A dovish stance from the Fed is bearish for the dollar and signals massive upside for the equity markets, gold, and crypto-currencies.
Areas of Focus in 2021
Equities/ Indices - It's important to understand what drives these markets. Nas and SPX500 have hundreds of companies in the index but are basically priced on the 5 largest companies. S&P is the largest 500 companies in the U.S. yet the top tech stocks make up almost 25% of the index. Big thing to pay attention to is the continued domination of the tech companies as the digital economy overcomes the legacy.
1) The Nas100, SPX500, and US30 are all dancing around all-time-highs. Large institutions are looking for massive upside potential but it's hard to get everyone to keep buying an overvalued market. The best case scenario is that indices release some of the pressure early this year and we can all look for buying opportunities at the discounted prices.
2) Congress announcing fiscal stimulus would add fuel to the equity markets. That correlation has been seen since last year. If this happens and the markets continue to trend higher then intraday trading will be the most beneficial as we can trade inside of predefined structures that the market creates.
Gold (XAU/USD) - Gold is priced in U.S. dollars and has always been a hedge against the dollar. If the dollar ever started to drop significantly and purchasing power was getting weak, gold would rise as a result and maintain your portfolio value. It is basically insurance against the dollar.
1) A continued decline in the DXY would have a long term bullish outlook for XAU/USD in 2021. This could get exasberted by any talks of further money printing or stimulus. A large inflow of dollars into the system would cause large investors to view the dollar as having too much currency risk and would, as a result, purchase gold to protect against further decline of their cash value. We could see gold hit as high as 2,500 if stimulus continues to be the answer to fight economic decline.
Dollar (DXY) - The DXY is an index that tracks the value of the U.S. Dollar v.s a basket of other currencies. This measure gives us insight into the performance of the Dollar and can help us trade other instruments that move with or against the dollar.
1) The biggest event to focus on for the immediate term is any talks of additional stimulus packages being proposed. More cash into the system will further weaken the dollar as large investors dump dollars for assets. Bearish dollar = XXXUSD bullish.
2) The biggest trade of your life will come when the Federal Reserve announces that it will start to increase interest rates. The DXY will see a massive pump to the upside if the Fed proposes a rate hike. The markets are addicted to cheap money right now and if the Federal reserve indicates that it will take the drug away then the market participants will have a temper tantrum and equity markets will begin to decline.
Euro- The Euro zone has been in a never ending battle to save the Union from monetary collapse. The political division, lack of cooperation, and risky monetary policy have contributed to a weakening of the Euro in recent years. Since implementing the Negative interest rate policy the Euro has seen a steady decline and will continue to do so since the ECB can't risk raising rates. We believe the Euro will continue its bearish trajectory over the coming years.
1) Brexit will play a huge role in the performance of the Euro V.s. the GBP. But monetary policy is the main priority. Negative rates are bound to cause a decline in the currency if they are accompanied by massive stimulus. Talks of a digital euro will also have a negative effect on the currency in the short term. Talks of an Centralized Digital Currency will also play a role in the weakness of the Euro.
GBP- Great Britain's economic agenda has revolved around 1 thing in the past four years; Brexit. Leaving the European union has proved to be a bigger challenge than GB bargained for and trade negotiations are still ongoing.
1) If the trade agreements favor G.B as oppose to Europe then the pound should rise as a result. This is the correlation that we observed in 2020, positive news about brexit was positive for the GBP. We expect G.B to continue to outperform Europe as the negotiations continue.
YEN- Although Japan has had a rocky 30 years dealing with the threat of financial collapse then Yen is still regarded as a safe haven currency. Due to its safe haven status we have seen a correlation between the Yen and Gold. USDJPY and the Dollar have a negative correlation (they move opposite) and we noticed a correlation with GBPJPY and gold as well.
Oil- Oil took a hit in 2020 due to the travel restriction implemented as a result of the pandemic. WTI went negative in March 2020 as a result of the supply/demand shock. A weakening dollar and vaccine hopes should stimulate the oil markets back into their respective range around $50 per barrel in 2021.
Conclusion
The main areas of focus going into 2021 are China trade relations, monetary policy response, and the prospect for fiscal stimulus. 2020 was heavily focused on the pandemic and managing the economic effects of the shutdowns, 2021 will be focused on the vaccine and transitioning back into productivity. We believe the prospect for stimulus is high if governments want to avoid a recession which will continue to a decline in the currencies that are printing more aggressively than others. The DXY should continue lower as a result and we can see a continued rise in asset prices going into 2021.
Pay close attention to how monetary response impacts the currency that you're trading and trade along with those correlations to have a successful 2021. Watch how money flows from one market to another during these larger macro events and use that guide your decisions on trend and momentum. Happy and safe trading ChartAddicts!
Disclaimer: This article is the result of the analysis carried out by analysts associated with ChartAddicts. The article does not purport to represent the views or the official policy of ChartAddicts. This is not investment advice.
Pipstradamus
ChartAddicts Analysis Team
01.11.2021