DM Monitoring
BEIJING: As the pandemic-battered global economy slid into a severe recession in 2020, global markets have turned more sensitive, with wild volatility seen from risky assets, notably stocks, to safe havens, such as gold.
Further development and distribution of COVID-19 vaccines in 2021 may help allay fears in global markets, yet uncertainties persist. The International Monetary Fund predicted in October that the world economy would shrink by 4.4 percent in 2020.
Although the world economy will likely recover from the slump, the impact of the ravaging coronavirus cannot be underestimated, and global trade is being reshaped by mounting geopolitical risks and transfer of power in major economies. These factors stoked widespread concern among investors about the prices of the four major assets — gold, the U.S. dollar, crude oil and stocks.
WILL GOLD HOLD FIRM?
Gold is always a safe haven for investors.
In 2020, fears of the greenback were simmering due to the combined factors of the pandemic, economic depression, increasing geopolitical risks and higher U.S. national debt. When adverse events occur and linger for a while, in addition to loose monetary policies adopted by countries, more investors are likely to pile their funds into safe havens like gold from volatile holdings and consequently drive up gold prices with increased demand.
Gold prices rose sharply amid volatile trading in 2020. Following the coronavirus outbreak, liquidity risks once emerged in the international financial market, and the precious metal drastically retreated after a strong start. As market sentiments improved, however, the yellow metal began to rally in March, and hit a record level of 2,075 dollars per ounce in August before dipping a bit.
On Dec. 31, 2020, Gold futures on the COMEX division of the New York Mercantile Exchange (NYMEX) closed at 1,895.1 dollars per ounce, up more than 24 percent year on year.
Multiple institutions have made optimistic forecasts about gold in 2021, reckoning that uncertainties surrounding global economic recovery and fears for inflation will push gold prices up. Besides, resurging demand for the safe haven asset in emerging economies and rising global debt will play their part in supporting the price.
Citibank has recently predicted that gold would soar to 2,200 dollars per ounce in three months, and to 2,400 dollars in six to 12 months. Goldman Sachs also expected the demand for gold to strengthen across emerging markets as gold demand in China and India “already displays signs of normalization.”
WILL DOLLAR CONTINUE WEAKENING?
The Federal Reserve in March unveiled unlimited, open-ended quantitative easing, cutting interest rates in two emergency meetings by a total of 150 basis points, which represented the government’s desperate attempt to stimulate the coronavirus-stricken economy. Such aggressive moves, however, triggered a dollar plunge.
With European Union (EU) leaders reaching a deal on 750 billion-euro (915 billion dollars) coronavirus recovery fund in July, further financial integration in the EU has boosted investors’ confidence in the bloc and the euro. Thus, while dollar falls, the euro strengthens amid increased optimism, reversing the prolonged weakness of the union’s currency.
“Market consensus has shifted towards the euro on the assumption that euro area will suffer less economic damage,” said Karl Schamotta, chief market strategist at Cambridge Global Payments.
The Australian bank ANZ forecasts the euro-to-dollar exchange rate will rise towards 1.30 in the medium term with a year-end forecast of 1.28.
HSBC said the euro exchange rate’s rally appeared to be a reflection of a broader risk appetite and a weaker dollar, as opposed to pure bullishness about the eurozone’s prospects.
“The relative attractiveness of U.S. financial assets is starting to wane,” said J.P. Morgan Asset Management. “We continue to believe that over the next 10 to 15 years, the dollar will weaken; but the exact catalyst for this trajectory change is elusive.”
HOW HIGH WILL CRUDE OIL GO?
Crude oil prices in 2020 indicated a “V-shaped” recovery.
The U.S. oil prices plunged nearly a third on Mar. 9, the biggest crash since the 1991 Gulf War, as Saudi Arabia launched a price war against Russia. And once again on April 20, oil prices dipped below zero for the first time, closing at -37.63 dollars per barrel in New York, in that coronavirus-induced oversupply of crude threatened to overwhelm storage facilities.
Oil demand rebounded and prices edged up in the second half of 2020 as the international crude market tightened the supply side and business activities resumed in many economies amid preventive measures against the virus.
On Dec. 31, 2020, the West Texas Intermediate (WTI) for February delivery closed at 48.52 dollars a barrel on the NYMEX, down 20.5 percent year on year. On the same day, Brent crude for March delivery closed at 51.80 dollars a barrel on the London ICE Futures Exchange, losing 21.5 percent for the year.
It is widely acknowledged that vaccination against COVID-19 will buoy optimism on the global economic recovery as well as oil demand and prices.
Potential rollout of high-efficacy vaccines in the short term would be a turning point for oil demand as it could lead to a more sustainable economic recovery, Barclays said in a note.
The British bank forecasts Brent at an average 53 dollars a barrel and U.S. WTI crude at 50 dollars a barrel in 2021.
“Looking ahead, 2021 oil demand is expected to recover strongly but remain lower than it was at pre-COVID-19 levels,” Deloitte said in an oil and gas industry outlook.
The U.S. Energy Information Administration expects high global oil inventory levels and surplus crude oil production capacity will restrain oil prices from going up through much of 2021.
The agency forecasts Brent prices will average 47 dollars per barrel in the first quarter of 2021 and rise to an average of 50 dollars per barrel by the fourth quarter.
WILL STOCKS COOL OFF?
Wall Street has been on a rollercoaster ride in 2020. The U.S. stock market reacted to unpredictability with large drops, triggering a market wide circuit breaker four times in March. But in November, the Dow Jones Industrial Average cracked 30,000 for the first time, surging 11.8 percent, the best monthly performance in three decades.
“What mattered this year (2020) wasn’t (corporate) earnings, but the speed and scale of the response by central banks and governments, alongside a recognition that the U.S. stock market doesn’t reflect the economy,” noted James Mackintosh, a senior columnist at the Wall Street Journal. Instead, so far as he can tell: “a far weaker economy, far weaker earnings, but significantly higher stock prices, at least in the U.S.”
Goldman Sachs said ramped up federal spending for COVID-19 relief measures and ongoing asset purchases by the Federal Reserve “could lead to a spike in inflation and interest rates,” a trend that has historically resulted in market pullbacks.
Asian stocks are set to outperform global markets in 2021 as an “earnings super-cycle” is expected to kick off across the region, Credit Suisse said. Japan’s stock market has seen strong gains since the start of 2020, rising more than 11 percent, and is likely to maintain that momentum into 2021, Japanese analysts said.
European stocks are estimated to keep climbing. Goldman Sachs predicted a bullish FTSE 100, with the index rising to 7,200 by the end of 2021.
Likewise, the German stock index DAX is projected to hit 14,000, and the Euro Stoxx 50 index, which covers 50 blue chip stocks in the eurozone, will reach 3,500, Deutsche Bank said in a recent report.
