The US dollar is starting the year on the back foot, losing ground to other major currencies during the early part of Monday’s session. Traders are carrying the optimism that defined the sentiment of the markets during the latter part of 2020 into the new year, as vaccine rollouts, promises of fiscal stimulus and the continuation of central bank dovishness continue to support hopes of a brighter future. Despite the latest wave of the pandemic that has engulfed Europe and the Americas, investors are choosing to look to a more positive future and this is one of the main reasons for the dollar weakness, with the greenback shedding the gains it had accumulated during 2020 thanks to its safe haven status.
2020 proved to be a positive year for gold with investors rushing to the long-established haven asset as the coronavirus pandemic triggered an economic and health crisis, but what are going to be the main market drivers for 2021?
After the black swan event dominated 2020, the lingering effects of coronavirus are still very much present and continuing to pose downside risks to global markets. We can certainly not exclude new, unpredictable risks: another black swan. All we can do is to take a look at those factors that we can predict. Among them there are various that could boost stock markets.
First of all, central banks will likely stick to their ultra-expansive monetary policies. Ultralow interest rates will support the appetite for stocks as investors seek higher yields. This could generate some distortion and could exacerbate rallies on some stocks but at the moment there is no clarity on when, or even if, this will end.
Moreover, after the plunges in GDP that most countries have suffered in 2020, there are expectations of a sharp recovery in 2021. The majority of macroeconomic data has indeed signalled a recovery in the second half of 2020 and most analysts are expecting this trend to continue.
Another positive element is the likelihood of a de-escalation in trade tensions. The election of Joe Biden as the next US president improves the chances of a smoother relation between the US and both China and the EU. And finally, after almost 5 years of debates and discussions, Britain and the EU have agreed the terms of their split. A relatively friendly and constructive post-Brexit partnership between the two blocs would certainly benefit both sides and would help to boost optimism on financial markets.
These factors, in conjunction with any potential fiscal stimulus, will be crucial for the market in 2021. Their development holds the key as to whether a sharp recovery is indeed possible in the next 12 months. Black Swan permitting, of course.
European shares registered moderate gains at the beginning of this new year amid increased risk appetite from investors. Vaccine deployments, central bank aid as well as stimulus measures from governments keep on sustaining market sentiment and are likely to remain as major market drivers for Q1. However, bullish performances have also been registered on more “defensive” values like precious metals illustrating that bullish investors are diversifying their portfolio and spreading their risk across different asset classes. This hedging strategy may be a sign of lingering uncertainties about the still fragile economic recovery being threatened by the new strain of the virus. This could lead to a bumpy Q1 if any problems with the vaccines emerge in the coming weeks. In the meantime, traders brace for a busy first week of 2021 with today’s focus on the highly anticipated OPEC+ meeting during which energy ministers will decide on oil production. Investors will also be keeping an eye on the FOMC minutes on Wednesday as well as the US unemployment figures for December on Friday.
Pierre Veyret– Technical analyst, ActivTrades
Disclaimer: opinions are personal to the authors and do not reflect the opinions of LeapRate. This is not a trading advice.
Independent writer and journalist, working in the global online trading sector, Steffy is the Editor of LeapRate. She has previous experience as a copywriter and has been with the company since January 2020. Steffy has a British and American Studies degree from St. Kliment Ochridski University in Sofia.