Financial Market Forecasts For 2020

Financial Market Forecasts For 2020

The Arkent Scenario describes the expected sequence of the behaviour of the global market complex of the Dollar, Yen, Sterling, Bonds, commodity credit and stock markets into the next big financial market dislocation caused by the Bursting of the Biggest Credit Bubble in History.

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The Arkent scenario has so far been very accurate and predictive with respect to the various sectors of the market complex. However, as originally expected, the last and only element that has not yet fallen into place is the US stock market rolling over. Instead, we have seen blow off price action that is typical of a major high, and which has been due to the amount of free money in the system, provided by the central bank printing presses which continue to allow companies to buy back their shares despite poor earnings growth. In addition, Trump has been sending out stock manipulating tweets to add to the updraft of collective delusion. However, the new year's assets allocation is now fully invested as the S&P approaches the  critical level of 3333. Any move above this band suggests that the blow-off has further to run. Where ever the high of the market is, once in place we expect general public sentiment to quickly become much darker and more pessimistic once the decline commences. Meanwhile, with respect to the Dollar’s decline against major currencies, cable has so far lead the way, but that pair will now correct until the end of January as the Brexit process kicks into its next phase of negotiation, pre the leaving date at the end of the month. The next big trading opportunity is that we expect the dollar to decline against its index and the Euro and Yuan. We have labelled the Dollar Yuan as the Empire pair as it reflects the geopolitical dynamic of China's hegemonic challenge to America and it is the pair leading the dollar decline, so worth watching closely.

Geopolitical risks.

  1. Iran - is Overextended and Vulnerable and definitely on the back foot economically and in dire straights. It’s just lost its No 2 man Soleimani, tried to retaliate by sending  missiles against an American base, that failed to kill any Americans (although one has to ask how that happened - was Trump lucky or was there a more sophisticated American response than we have been told? Where were the Patriot anti-missile batteries?) and shot down a domestic airliner in a tragic error. There will no doubt be internal discord and talk of revolution. However, the Iranian leadership is not going to give up whilst they are still breathing. I suspect that they will be redoubling their efforts to achieve a nuclear breakout very soon. Such attempts to breakout, if detected by Israel or America will result in large scale strikes against all nuclear facilities. Or they will achieve nuclear status and start a nuclear arms race in the Middle East. The later would be preferable, as it would leave Iran in a state of virtual collapse and only then might we see a more moderate regime change.
  2. North Korea - Kim has not gone away and is frustrated that sanctions are still in place. Thus we can be assured that at a time of maximum stress Kim will start launching missiles to test Trump's resolve.
  3. Trump under pressure –  As an unconstrained narcissist, we should expect him to respond to pressure by becoming even more unpredictable. First, there is the impeachment process, ( The Demise of Trump and rise of Bloomberg) due to initial Republican senate protection for Trump, this may look like a busted flush for the Democrats. However, this is in effect a public trial, where public opinion will affect the outcome. If public opinion turned against Trump, then the Republican senators might be persuaded to take a different stance. Especially as the arrival of Bloomberg into the election ring may yet prove to be a swing factor as he is by far the most credible Democrat candidate and could potentially successfully challenge Trump for the Presidency.
  4. The US-Chinese trade deal is just a ceasefire after a two-year struggle, during which US growth maintained 2%. However, we should remember that its key strategic purpose should have been to constrict the Chinese economy, thus limiting its growth and challenge to American Hegemony. However ,to date that has not been the outcome.  The  compromise deal to be signed this week by Trump, despite whatever tweets are sent out, will have fallen far short of such a  strategic imperative and thus have been a major win for Xia and China who will be left unchallenged to continue gaining ground on America. The reality is that doing a deal at this stage might be a short term gain for Trump's opinion poll, based on the stock market price, but in reality, it is a massive negative long term for American power. In summation, Trump's deal is but a truce much as the Hitler Stalin Non-aggression Pact was; until one side decides that they were ready to strike. In the case of China, it's all about filling the consumer gap so that its manufacturing products can be bought by the growing middle classes, such that exports are a bonus and not an imperative for the economy. As each year passes, this gap narrows and soon will be at a point where a trade war will have less and less effect. Thus time favours China , not America.
  5. The American economy 
    1. Over the past year, great forces have been at play. On the one hand, there is the global economic slowdown in commodity demand, associated with the US Chinese trade war. On the other; the forces of Financial Central Bank engineering have been trying to counter this negative economic force and of course, there is a great deal of excess money sloshing around the system looking for a home.T he situation conjures up the  image is of a man who has run off a cliff very fast and for a time looks to be suspended on air... until gravity takes sway!
    2. The impending US Credit Crisis has great similarities between 2007 with the high level of global credit to GDP. Today, the US  ratio is well over twice as high as it was in 2007. As long as the debt issuance music played, all was well in the world as the giant ponzi scheme continued to expand. However, now that the mood music has stopped and the global economy has hit the brakes, we sit on the cusp of the biggest credit crisis that the world has ever seen. Encompassing private to corporate to sovereign debt. It is this unwinding and its associated effects that are tracked and anticipated in our Arkent Scenario along with a slowing global economy creating significant asset deflation, as the old world bifurcates into an American and Chinese mercantile world.
    3. In America, we maintain that there is very little left in the Feds armoury to keep its stock markets afloat. As such the failure below 3333 on the S and P in high probability represents the long term high of US stocks. Notably, the US banking Index has made its high a while back but has been coiling for a decline since then. We will continue to watch JPM stock as belle weather, simply because when the strongest bankrolls over  the banking decline is truly upon us. It is our prediction that JPM stock is at its multi-year peak and will fall from these levels. However, as a risk-taker, we would look to short the weakest US banks, not the strongest! One confirmatory signal that stocks are rolling over has been the onset of the next phase in the decline of the dollar index. We expect this move from the 99.00 recent highs to be very significant, and that it will make new lows in the 70.00 zone, during the next 24 months. When the stock market accelerates to the downside, we do expect to see US yields to go significantly lower, before backing up in a significant way in a US debt crisis.
  6. China Xi's Three challenges - Whilst Xi's long term plans to become the world's greatest power are mainly on track, economically and militarily the grumbling sore are the Chinese, who have over generations been converted to freedom and democracy in Hong Kong and Taiwan, and providing a thorn in his side. The longer the standoff persists, the clearer the demonstration to the west that China's rise is, in fact, an existential threat to Western democratic values.
    1. Taiwan's Independence - having voted for continued independence from mainland China after Tsai Ing-Wen’s landslide victory last weekend Taiwan is on a collision course with Beijing. Tsai has made the point she won because voters agreed there are irreconcilable differences between what Hong Kong citizens want and what Beijing demands,  “one country, two systems” will not work due to Xi’s ambitions, and doesn’t work for the Island. This inevitably risks military intervention, as the PLN becomes more confident that it could keep out American carrier support from the Taiwan Straits.
    2. Hong Kong’s wave of protest, supported by the recent election, has provided a global focus on the authoritarian rule of China and its clash of civilization with the West. This was reinforced when Congress passed the Hong Kong Human Rights Bill to the indignation of China. Thus we view Hong Kong as a catalyst for the deterioration in US Chinese relations. We are sure that the people of Hong Kong, whilst taking a breather, will be back on the streets again in 2020.
    3. The Yuan Interestingly looks set to appreciate against the dollar in 2020, which will weaken Chinese exports, slowing down economic growth.
  7. In Europe - Italy risks default - of special note is the Italy 40 which has never recovered above 38% of the decline from the 2007 high and the whole decade has been one long narrow trading range. Taking the lesson from Tullow Oil’s demise, the break to the downside will herald the collapse of the Italian financial system. This includes a collapse of BTPs. Meanwhile, Bunds have finished their correction to the lower yields trends and will return to negative yield levels in the months ahead as the initial phase of the debt crisis unfolds. Meanwhile, we expect the Euro to gain ground against the dollar. However, the impact of Britain leaving the crumbling EU system will also hit home in 2020, realising it will have lost the 6th largest economy in the world.
  8. In Britain, as I expected, Boris won a clear thumping majority win that will place him in power for at least 10 if not 15 years. This period of wealth creation stability sets the scene for a long term sterling rally, but until the end of January, we expect a correction back to 1.28-1.27 before the bullish next leg unfolds. Gilts will however rally and the FTSE will decline along with the other stock markets. Boris will have a strong hand in the next stage of the negotiations, and Cummings will enact a right-brained revolution within government strengthening Britons long term efficiency and creativeness.
  9. Climate change shocks, such as the bush fires of Australia will become a regular occurrence and in extreme cases affect politics and markets directly. Russian and Canada will benefit from northern land and resources becoming accessible as the temperatures moderate.
  10. Carbon Emissions lead the way with so much central bank market manipulation, finding clean unmanipulated markets as key leading indicators is essential. In that regard, the Carbons emission market is proving to be a powerful leading indicator and we have been tracking this market with interest, as it shows a clear peak with a major continued drop ahead. With climate change being present in the mind of the world, we do not see this as the end of a false religion, as some unscientific people might think, but rather a leading indicator of a major global industrial slowdown. The price next leg down is about to commence.
  11. The Oil and Gas Space. With our call that oil will drop from the current $59 to below $27, we expect this business sector to become a disaster zone in the year ahead. Indeed our call only a month ago that at 200, Tullow oil was just waiting for the axe to fall in the coup de grass, with our target of 50 has come true in swift order which is a 75% drop. This is a warning that large companies like Exon, Shell, and BP are all very vulnerable in 2020 to big share price drops and consolidation. As for the Saudi Aramco Float and its investors, we see the only disaster for both!
  12. A Commodity Price collapse with global demand continuing to collapse in 2020, I expect the next 12 months to see global commodity prices drop by an average of 50% to complete the decade long counter-trend correction of the K cycle. The resultant lows will offer a generational opportunity to buy resource assets and extremely low prices that will rally 100 times in the next decade. Much as Luke oil did when I bought it at 0.64 cents and sold it at $64 20 years ago.

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