In our business, we’re trading the future, and we continually try to make predictions of how and why financial markets move. If you think back to this time last year, you couldn’t possibly predict how 2020 would turn out.
The Brexit transition period ending, the November presidential election, and the ongoing Middle East tensions. These were the upcoming and ongoing events that concerned most analysts, investors, and traders. You could add mild concerns over the continual spat between Trump and China to that list.
Our leaders have learned nothing from history
Only specialists who work in infectious disease control and identification could rightfully claim to have seen a zoonotic virus such as COVID-19 running amok through global society.
Because of the nature of black swan events, you never see them until it’s too late. We never saw the subprime banking crash of 2008-2008 coming, and we never saw the first global pandemic since the Spanish flu (also known as the 1918 flu pandemic) hitting us for six.
Lasting from February 1918 to April 1920, it was a deadly influenza pandemic caused by the H1N1 influenza virus. It infected 500 million people (a third of the world’s population at the time) in four successive waves.
The tragedy and irony of Spanish flu; that the virus spread by soldiers returning home after fighting in the Great war, and killed more citizens than soldiers killed in combat, shouldn’t be lost in today’s COVID-19 conversation. As a global community we’ve repeated the same mistake; our insatiable addiction to movement caused the COVID-19 virus to spread like wildfire inside days and then mutate.
We’ve witnessed the curious development in our language’s lexicon; lockdowns, tiers, vaccines, asymptomatic, bubbles, PPE, intubation, hand-sanitisation, social distancing, masks, are words (and phrases) liberally used during 2020. The impact the virus had on financial markets and our general way of life were all-consuming.
Brexit is not the cause for celebration the UK government projects
As human beings, we crave freedom. Watching the UK government remove that fundamental right to roam across Europe from its citizens as it pursued its Brexit agenda was sad to witness. The only benefit of Brexit for us traders and investors has been the increased volatility and volume of trading in FX markets involving the euro or sterling. Strip away the hype and the UK pound has suffered.
While GBP/USD is up over 3% YTD, EUR/GBP is up 6.5%, GBP/CHF is down -6.30%, GBP/AUD is down -6.53%, and GBP/JPY is down -2.23%. The rise of GBP versus USD during 2020 is due to dollar weakness, not pound strength. The UK economy’s lack of investor confidence is illustrated by the UK FTSE 100 enduring its worst year since the 2008 crisis, ending the year close to -14% down.
Confident analysts predict the rise of European markets during 2021 if the vaccines are successful. Germany’s DAX 30 is up 4.44% year-to-date, but right now the COVID-19 is running wild through the country; therefore, we can’t predict the knock-on economic effect on the economy in the first two quarters of 2020 if strict lockdowns continue.
The UK is in an equally dire pandemic situation and like America; implementing start-stop lockdowns to put the economy first ahead of public health has proved disastrous and counterproductive. The US reported close on 4,000 extra virus deaths on December 30, and the UK 1,000.
The mainstream financial press has largely ignored the US dollar slump
The US dollar has experienced a significant slump during 2020. The dollar index (DXY) is an index comprising a basket of currencies and illustrates the fall’s magnitude. Down -7.0% during 2020 it’s -10% below the 100-trading level, which is considered a balanced metric of value.
EUR/USD is up 9.41% YTD, and it’s worth noting that both the ECB and Fed have orchestrated ZIRP and NIRP monetary policies during 2020. It’s not as if carry trade has developed, because the Eurozone uses a 2% interest rate and the USA -1.0%. Both antipodean currencies have also roared ahead of the US dollar during 2020, NZD is up 7.46% and AUD up 10.26%.
The gravity-defying rise of the NASDAQ should be a cause for concern
While the US dollar collapsed in 2020, US equity markets experienced vast and wild fluctuations. The leading indices the DJIA 30, SPX 500 and NASDAQ 100 fell by nearly 25% across the board during March as analysts and investors quickly crunched the data and calculated the potential virus damages. However, the cavalry quickly arrived in the form of gargantuan levels of monetary and fiscal stimulus.
The Fed and US Treasury suggested the financial rescue would float all boats, but if you’ve lived long enough, you know the trickle-down phenomenon is a fallacy. The stimulus stayed locked in financial markets, while the current weekly unemployment claims averaged 836K over the last four weeks.
The net result of the stimuli and rush to speculate has been a rise (from trough to a peak) never seen in recent history. From -25% down the NASDAQ 100 is ending the year up 47.73%. It’s hard to process such a massive rise, against the backdrop of a raging pandemic.
Sure, in a zero-interest rate policy environment stimulated to the tune of $4 trillion, the money will flood into markets. But that doesn’t justify why Tesla’s value has risen by over 500% during the year despite only delivering a relative handful of uninspiring cars with built-in design faults.
This stratospheric rise in the NASDAQ and “FAATMAN” stocks perfectly illustrates the complete dislocation between our financial markets and real lives. An extra fifteen million US adults got added to the jobless statistics from March, but the equity markets roared ahead. The government apparatus took months to agree on a handout of $600 per adult in need (only $300 once you net out the expiration of other benefits), but the 600+ billionaires in the USA added a combined one trillion dollars to their wealth.
Can we experience the roaring ‘20s?
Back to our Spanish flu pandemic comparison. Once the pandemic disappeared, the western world enjoyed a period of unprecedented growth during the 1920s finally ending with the first major stock market crash in 1929.
If the vaccines work, then the prediction that we’ll go back to normality and party like it’s the roaring ‘20s don’t appear farfetched. Cocooned in our safe, lockdown spaces for a year, we’ll be raring to get out, travel, socialise and spend.
The fly in the ointment to our enjoyment and reset back to normality is jobs. Once we comb over the debris and detritus of economic damage, analysts and economists are unsure how long the rebuild will take. For example, there are 5.5 million workers on leave (furlough) in the UK working for 2-3 million business. How many of these businesses are now zombie businesses, that can’t possibly rise Phoenix-like from the ashes, could it be as high as 50%?
This desperate situation will get replicated in all major European countries, the USA and many South and Central American economies. Can economies who are 80% reliant on services and consumers quickly reclaim lost ground from a standing start? Only other massive levels of stimuli can buy future economic growth.
2020 has been a torrid year, but we must accept our position as investors and traders to search for growth. The volatility we’ve seen in our FX markets has provided fantastic opportunities.
- If you bought gold and silver as a hedge to support your FX trading, then you made a wise move. Silver is up 48.60% during 2020 and gold up 24.80%.
- If you bought BTC because you judged it was more than a “virtual speculative asset with no intrinsic value”, then you’ve every right to feel smug.
- If you stayed long US indices whilst many lost their heads, then you’ve been proven right.
Whatever 2021 brings you in terms of investment and trading opportunities, don’t ignore the basics. Control your risk, find your edge, keep your emotions under control, don’t overtrade and make sure your capitalisation matches your ambition and strategy. Make sure you study your economic calendar because a return to a new-normal might equal a return to fundamental analysis working.
Oh, and make sure you continue to trade through an ECN/STP broker who offers zero-fee accounts and some of the tightest spreads and quickest fills available. Happy New Year.