Investors will be wondering what’s in store for December after the stock markets enjoyed one of their best months ever in November. Global value stocks surged along with risk-sensitive commodity dollars, crude oil and Bitcoin. November’s price action was a direct reflection of investors’ confidence about things returning to normalcy in 2021 with the development of vaccines. That’s why commodity dollars such as the Norwegian Krona and New Zealand dollar were among the best performing currencies, while haven currencies such as the US dollar and Japanese yen, as well as gold, were all undermined.
Source: ThinkMarket and TradingView.com
In the
month ahead, I think we will see further weakness for the US dollar because of
momentum selling, while Wall Street shares should hit new record highs for the same reason. Further ahead, it all depends on how the global economy evolves. For as long as recovery hopes remain alive, the upside should be limited for the dollar, and downside limited for stocks. However, slightly
longer-term, we could see the
return of taper tantrum, possibly from the second half of 2021, as central banks start talking about normalising their balance sheets.
With things hopefully going back to normal, and given the past stimulus programs, there is a good chance for inflation to overshoot in the second half of 2021, resulting in tighter monetary conditions. If so, there will be big risk that the extremely overvalued US equity markets could slump as central bank support is withdrawn.
Currently, though, that is the last thing people are thinking about and there are no signs that monetary tightening will happen any time soon. Indeed, the
ECB is about to expand its balance sheet further in a couple of weeks’ time. But if the vaccines trigger a sharp recovery for the world economy, and inflation is overcooked, then this could lead to tightening of monetary policy by major central banks in the second half of 2021. And with it, the markets might actually fall back.
Meanwhile, there are also concerns whether the vaccines will be distributed fast enough, and whether people will be comfortable taking the jab. So, there is that uncertainty as well to take into account.
What’s more, the US and EU have so far failed to release fresh
stimulus funds amid a political deadlock on both sides of the Atlantic. The longer the stalemate continues, the more damaging it will be to the economy. Investors will want to see these issues resolved as soon as possible, for demand concerns could come back to haunt investors if the upcoming lockdown-hit economic numbers paint a very bleak picture about the recovery.
Speaking of data, here’s what’s in store for the next few days: