The Year Of The Bull: Exness Market Predictions For 2021

Lunar New Year is on the 12th of February 2021, bringing with it the second in the sequence of 12 animals, the bull.

Whether the year of the bull in the Chinese zodiac means a year of bulls in markets is a question best directed at exponents of alternative technical analysis. What we can do here, though, is to take a flight of fancy based on events and trends this year so far to see how they might pan out. Michael Stark, market analyst at multi-asset broker Exness, takes a look at three main themes:

• Commodities shining: inflation drives buyers of silver, gold and oil
• Cold feet in stock markets: overvalued shares correct significantly as monetary stimulus is cut back
• Exotic events: the rand, lira, peso and more gain against majors as trade redevelops

Commodities shining

Although gold retained its role as a haven for most of 2020 and reached several new all-time highs, oil struggled from dual shocks to supply and demand and silver ended the year worth only slightly more than half its all-time high. When the Fed announced its abandonment of set targets for inflation in the USA at 2020’s virtual Jackson Hole summit, neither gold nor silver made clear immediate gains.

Now, though, with practically zero chance of any major central bank raising rates this year and surging production inflation, the stage might be set for another rally. ISM purchasing managers’ index in December revealed the seventh successive month of rising manufacturing activity, with the strongest growth in more than two years.

Given the sensitivity of gold, silver and other metals to the early stages of inflation, a continuation of this uptrend for PMI might lead in turn to new uptrends for precious metals. Traditionally, central banks attempt to control inflation by hiking their base rates. However, there is a clear risk in 2021 that this approach might scupper the fragile economic recovery.

Silver has perhaps the most to gain of any major commodity. In addition to its use by ‘stackers’ as a store of value, a large amount of global production of silver is used in industry, around 40% in 2020. Sales of electronics, photovoltaics and other finished goods are likely to increase significantly this year as recovery gains pace in economies around the world, and biocides will be in ever greater demand for obvious reasons.

From a technical perspective silver also appears to have more room for gains than gold this year. A more sudden shoot up on the chart of XAGUSD was followed in late 2020 by retracement and consolidation around 15% below the year’s high of $29.82.

A breakthrough from that area could see attempts on the weekly Fibonacci extensions around $33 and $39 with January 1980’s high around $35.30 in between. Some stackers even predict a retest of silver’s all-time high of $47.95 from April 2011, a projection that doesn’t look so outlandish now that central banks’ arsenals are empty and demand is steadily increasing.

With Exness you can speculate on the prices of gold, silver and other precious metals against a variety of currencies from the same platform. Exness offers some of the widest ranges of pairs with these popular instruments, consistently low average spreads and a variety of accounts for traders of any level of experience.

Cold feet in stock markets

Here’s a projection that does look outlandish: shares might not always go up.

For much of 2020, many large cap shares made strong gains as new money from QE flooded into stock markets. This came despite mixed fundamentals in many cases, with some basically stagnant companies showing enormous jumps in valuation.

‘Old economy’ businesses like banks and energy generally suffered, though, as the price of oil crashed in Q2 and most people expected much higher rates of default on loans. Many of these shares are now undervalued, while big tech shares have suffered from very high ratios of price to earnings, over 40 in some cases.

Alphabet Inc is a prominent example of a share that seems to have reached a plateau in late 2020. Although profits and EPS increased fairly consistently last year, these didn’t match the strong gains made by the price of the share itself, so activity has been fairly muted since November. GOOGL shares can be traded on Exness’ trading platforms, as well as other popular stocks such as Tesla, Amazon, Apple, and Netflix. The volume of buying required to move GOOGL up by 1% is obviously much higher than for small growth stocks and for that matter neglected traditional defensive shares:

Bank of America Corp has been one of the most strongly trending major shares since the last quarter, gaining nearly 50% since early November while many tech shares have been more-or-less static. This positive situation for financials and other conventional defensive shares seems likely to continue in 2021 as banks return to profitability and economic recovery seems set to gain pace.

Despite the price of oil remaining relatively low compared to where it was this time last year, major energy shares have returned to the focus of traders and investors in 2021. Exxon Mobil Corp, which was removed from the S&P 500 in the fourth quarter of 2020, is an obvious example:

The timing of the reversal of XOM’s downtrend is similar to the initial shift away from tech and back to the old economy, with a fairly swift bounce from lows near $30 in early November. Here, though, fundamentals aren’t necessarily on side in the way they are for banks.

With the early signs of inflation in view and recovery in progress, oil might well make gains in 2021. However, there are still many ifs and buts. If markets aren’t looking too far ahead, energy companies are likely to see their valuations recover this year.

The bottom line is that while shares don’t always go up, the crash probably isn’t coming either. Tech has been a bellwether for American stock markets for so long that many participants find it strange to consider the overall situation without discussing FAANG. Now, though, as ‘Covid defensive’ shares have become so dramatically overvalued, the time seems to be here for other sectors to steal the limelight.

Exotic events

From the lira and rand to the peso and baht, 2020 was in general a very bad year for exotic currencies. Many of these are commodity-driven at least to some extent while also being sensitive to the outlook for trade, so as countries locked down and industrial activity around the world sank, most emerging currencies plummeted against the dollar, euro and other majors.

Based on recent data, China is well on the way to recovery. Manufacturing activity in China has been increasing, bringing with it greater demand for oil and other raw materials imported from South Africa, Thailand and many other countries.

Caixin manufacturing PMI reached a decade high of 54.9 in November 2020, coming as part of eight successive months of expansion in the sector since the first wave of covid-19. Since China is the main destination of exports from the world’s emerging economies, it’s reasonable to expect gains for emerging currencies to follow.

The peso is among the exotics with the most potential to gain in 2021, having only recently strengthened below $20 to the US dollar. MXN’s normally strong correlation with crude oil has helped, but with recovery in manufacturing demand and trade plus rising inflation, all the factors now seem to align for gains by the peso, especially against the weakening dollar.

On the other side of the coin, currencies like the lira are inversely correlated with crude oil: Turkey imports almost all of its oil from Arab countries. Reasons for positivity in this case include restoration of international trade and the possibility of tourism’s comeback this year if vaccinations continue at the current rate. Turkey’s foreign reserves used to pay debts traditionally come in no small part from tourists’ spending, so strong recovery by the lira back to areas familiar from late 2018 is likely if current expectations for a new ‘roaring twenties’ turn out to be accurate.

Many central banks around the world slashed rates and launched record QE programmes last year, but Turkey, South Africa and other emerging economies were exceptions. The Central Bank of the Republic of Turkey’s one-week repo rate remains at 17%, and the resultant differential with hard currencies is still among the highest on record. Combined with all the other factors, this makes a flourishing carry trade this year not nearly as unlikely as one might have thought last summer.

Bulls and oxen

Whether 2021 is the year of the bull or the ox depends to a great extent on how smoothly vaccines are rolled out and the world returns to something like the pre-covid normal. Equally, many plans for recovery are still developing: nobody knows for sure what the much-touted Great Reset will look like, so we also don’t know whether the predictions here are likely to materialise.

One way or another, volatility is likely to decrease compared to last year but remain relatively high. As the business and economic cycle changes, movements for shares, commodities and more could be very erratic at times. It’s possible to take advantage of volatility if you have realistic expectations and understand how key drivers are affecting markets: having a CFD account funded and ready is potentially a good way of doing this.

What do you think? Is silver reaching $48 guaranteed, is it pie in the sky for the lira to recover, or do you have another prediction for this year of promises? Let us know in the comments!

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