2020 Yearly Analysis: What Will Drive The Markets & Currencies In 2020? – A Review Of The Economy, Trade Wars, Brexit, Geopolitics, Risk-On Vs. Risk-Off Sentiment
Is A Major Iran - USA War Upon The World In 2020? - Geopolitical Situation Worsens Significantly Amid Middle East Tensions Over Slain Iranian Commander
Unlike at the beginning of the last year, risk appetite was in the driving seat at the turn of the year 2020. However, that all may have changed with the US strike and killing of Iran’s top general Qasem Soleimani on January 3. Even though equities and other risky assets have been rallying for the most part of 2019 and into the end of the year, geopolitical conflicts have been worsening in the background, and it seems that now the floodgates to significant conflicts have been open just at the start of the new year.
While the fears for a start of WW3 seem unfounded at this point, the risks of a direct US vs. Iran conflict are now dreadfully high. Trump and the US may have already triggered a war in the Middle East with the killing of General Soleimani. Everyone is now anticipating how and to what degree Iran will retaliate (and most probably they will).
It’s hard to imagine how the situation can de-escalate before first turning worse.
This is worrying for the markets and the economy. The truth that Trump and US military leaders may have overlooked is that Iran is not Syria or Libya. Iran is a country of 80+ million people with a dominant influence in the Middle East and is probably the most powerful force in the region. Thus, Iran can hit back fiercely in response if it decides to take such an extreme course of action. Of course, if Iran does hit directly at the US, it would be risking a lot itself, so because of this, such a scenario is seen as unlikely for the time being.
Nonetheless, Iran will almost certainly retaliate in some way (either direct or indirect), which in turn, will likely lead to additional retaliation from the US. For the markets, it means that Oil and Gold prices will remain elevated as well as other safe-haven assets and currencies. In particular, the price of Oil will be of great importance for the global economy and as it can increase the risks for a possible recession later this year. If energy prices rise sharply in response to a war in the Middle East (and they will if Iran - USA tensions escalate into a full-blown war), then a global recession will be becoming that much more likely.
With all that said, we have to remember that while the Iran-USA confrontation is the main focus in the first few days of the year, it remains to be seen how things develop. A de-escalation is in everyone’s best interest, and although at the moment that seems an unlikely scenario, it is not impossible.
Oil prices have a major impact on the global economy and inflation rates, which is the primary target of monetary policy for central banks. The price of Oil also directly affects multiple currencies and indirectly the broader Fx market. Sharp moves in Oil will certainly trigger bouts of volatility in other markets as well.
2019 in Review - Central Banks Eased As Economies Slowed Down; Some Progress On Brexit & US-China Keeps Hopes Alive
Taking a look back at 2019, there were two large-scale issues that worried the markets, namely Brexit and US-China trade relations. While notable progress was achieved on both these fronts, the solutions that come in the form of the deals are far from complete and far from fully eliminating the risks of a hard Brexit or a prolonged US-China trade conflict.
Looking at the global economy, the global slowdown continued from 2018 into 2019 as all major economies experienced slowdowns. Their respective central banks restarted easing and stimulus measures in response (including the two largest central banks, the Fed and the ECB), which led to broad currency weakness and the strongest Gold rally in years.
Risky assets and stocks, on the other hand, liked the stimulus from central banks and have strongly recovered since the lows of December 2018. However, with new geopolitical and economic woes on the horizon already for 2020, it won’t take much for this trend to reverse. Shall things deteriorate, particularly at the hands of worsening geopolitics and escalating conflicts as discussed above, stocks may crash while the bull run in Gold will likely only continue to climb higher without looking back much.
What Matters Now? – Looking Ahead At 2020
Looking ahead at 2020, there are many things that the markets have to worry about. The fragile risk-on rally in stocks that lasted throughout 2019 may falter quickly on escalation on a number of critical issues. Most of these issues are rolling over from last year and have been taken into account by investors for a while already. Among them, the risk of a USA – Iran open military conflict was something not on the radar previously and thus takes the primary focus in the near-term.
So, here's a brief review of some large-scale factors that could drive markets in 2020 on a broad basis:
For the moment, there are too many simultaneous issues that are too complex and serious, making the clearing of these uncertainties any time soon unlikely. Thus, the overall risk environment at the start of 2020 remains grim and a geopolitical escalation can only make things worse. This suggests that Gold and other safe-haven assets and currencies would likely remain favored in 2020 – extending the general trends from 2019.
Gold could easily climb to the $1800s on a sharp worsening of global geopolitics or fears of a global recession. Overall, there is little argument against higher Gold, but most factors are progressively turning bullish for the yellow metal. The technicals tell us that the trend thus far is mighty which could help to propel a potential rally further higher.
Note: Be sure to also read our Yearly Forex Outlook For EURUSD, GBPUSD, USDJPY. Find out the specific levels and fundamental factors that you need to follow in 2020 to be profitable in Forex trading. Find it 100% for FREE here.
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