Volatility Ahead In 2021
The year behind was one for the history books but if 2020 was merely the opening chapter of these extraordinary times, then buckle up because there could be volatility ahead in 2021.
The two political events staring right at us, the US presidential inauguration 2021, and Brexit have the potential to trigger extreme volatility in 2021
Polarized politics, driven by passionate ideologues, whether it be Trumpism or Brexit, could be the catalyst for extreme financial market volatility ahead in 2021.
So, let’s take a look at the Brexit deal, which is a no-deal Brexit reality, bearing in mind the UK’s entire service sector, which represents 80% of the UK economy, will be subject to new EU tariffs.
The City of London, the golden goose of the UK economy, generates 7.2% of economic output, which includes financial services, insurance services, legal services are now subject to EU tariffs.
A new red tape, which includes product regulations and product customs border checks, will slow down UK-EU goods trade. Brexit is anticipated to cut 4% of the UK’s economic output. Moreover, from a social perspective, UK citizens will lose their European citizenship, the automatic right to live and work in EU member countries. UK students will also lose their Erasmus.
Frankly, for the many, it is a no-deal Brexit and a headwind on the already fragile pandemic UK economy. There are a few winners, for example, the Brexit backing sugar refiner Tate and Lyle Brexit is a sweetheart deal because the company is no longer bound to EU green policies and can now profit by offshore environmental concerns.
But perhaps Jonathan Powell, Chief of Staff to Tony Blair from 1997 to 2007, sums up the reality of the Brexit deal or perhaps better said no deal.
“A series of British blunders allowed the EU to get its way “on every major economic point” in the negotiation, while the UK was left with “a few sops” on state aid and the role of the European Court of Justice.”
Brexit is likely to be a slow puncture on the UK economy, and when the market figures out the tires are flat, then you are likely to see volatility ahead in 2021 UK assets
It will be interesting to compare UK blue-chip earnings with other foreign rivals to gauge the impact of Brexit going forward, although several multinational UK companies are already trading on WTO terms. Nevertheless, a forecasted drop of 4% in the UK GDP is likely to hit FTSE100 earnings, if so, that is not being priced in by the market.
So, I see volatility ahead in UK assets in 2021 and perhaps a devaluation in GBP to reflect what could be at best an economic malaise going forward.
The US presidential inauguration 2021 scheduled for January 20 could also fuel volatility ahead in 2021
As they say, hope for the best, expect the worst, and take what comes.
A US presidential candidate conceding to a victory is normal, but these are not normal times.
What if a US constitutional crisis plays out, where President Trump refuses to concede, believing the election was rigged, so failing to get a remedy through the justice system Trump then imposes martial law and orders a new election.
It sounds far-fetched, but maybe it is not in these extraordinary times, bearing in mind an extraordinary warning was issued to Trump against the use of military over election by former Pentagon chiefs.
But how much weight do warnings from former heads have? What if Trump surrounded himself with aspiring young military offices who see eye to eye with Don’s ideology, thirst for power, status, and eagerness for rapid promotion up the ranks. What if Trumpism, the ideology goes radical, and the White horse saviors of the republic mobilize their foot soldiers?
What we learned from last year is to expect the unexpected, so what if the World’s superpower winds up in a constitutional crisis?
Political upheaval in the US would surely fan unquantifiable volatility ahead in 2021
But even if Trump goes off quietly into the night, the ghost of popular nationalism has awoken, and Trumpism could go radical, underground.
Maybe geopolitics, somewhere in the world, not on mainstreams radar, will fuel volatility ahead in 2021
The usual hot spot in the Middle East, Iran could accelerate its Uranian project in anticipation of a less pro Zionist Biden administration, which would invite an Israeli military response. The risk of a regional conflict going global is always present.
The Indian Chinese skirmishes of 2020 could also flare up this year. In the Pacific, another hot spot continues to brew with the South China Sea disputes as China continues to want to throw its weight around in the region. Chinese military action against Taiwan is always a possibility in 2021. Moreover, North Korea, in defiance of the US, continues displaying and developing new ballistic missiles. In Europe, there is a new cold war, Russia’s shadow conflict with Europe over “Motherland” in areas of Eastern Europe that were once a part of the Russian Empire and the Soviet Union.
Perhaps geopolitics will fuel volatility ahead in 2021 as the world’s superpower and global policeman, the US chases its tail in what could be a constitutional crisis, adversaries are flexing their muscles everywhere.
But maybe volatility ahead in 2021 could come from the popping of the everything bubble as the central bank Put is shelved
Think about it. Tesla is now valued more than nine of the largest auto companies globally, and yet it only manufactures 499,550 compared with 71 million autos in the same year. Bitcoin, an encrypted digital ledger which provides no dividends, no yields, and no interest, has no use in the production or a medium of exchange was among the best investment in 2021. Will central bankers admit what they already know, that central bank liquidity is not the solution to a systemic crisis and will only lead to massive bubbles and mal-investments.
So, I see volatility ahead in 2021 whether it be geopolitics or central bank related. Finally, I would like to wish a happy new year and prosperous trading to all the readers.