By Geoffrey Smith
Investing.com -- The world economy is supposed to rebound sharply next year from the biggest, broadest economic shock in modern history in 2020. The distribution of vaccines against Covid-19 is set to banish fear of the coronavirus and allow a return to pre-pandemic patterns of work and consumption. Central banks have promised to keep the lid firmly on interest rates, while governments are set to keep borrowing and spending high in order to ensure that viable parts of the economy don’t collapse before the health situation returns to normal
Markets are forward-looking and the fact that stock markets in the U.S. and much of the rest of the world are already at or close to record highs suggest that that bright narrative has already been largely priced in. What happens next? Here’s a look at some of the events and themes that have the capacity to shake the consensus and push markets around next year.
1. The Biden effect
Everyone expects the new President to throw money at reflating the economy as soon as he’s inaugurated on January 20th. However, his ability to do so will hinge on the outcome of the runoff elections for Georgia’s two Senate seats on January 5th.
Unless the Democratic Party flips both of the two seats up for grabs, the Senate will remain in Republican hands for the next two years, a strong check on the big-spending ambitions of the Democrats who have the majority in the House of Representatives (just look how the Senate under GOP majority leadership has whittled down Nancy Pelosi’s initial $2.5 trillion plan for additional stimulus to less than $900 billion).
In all probability, if the Republicans keep control of the Senate, then much of the agenda expected from Biden will be impossible to advance, be it higher spending on infrastructure or higher taxes on capital gains and income. A Senate that turned a blind eye to the massive widening of the budget deficit under President Trump – even before the coronavirus disaster - may suddenly rediscover its fiscally conservative leanings.
However, Biden will have plenty of opportunity to influence stock market sentiment through foreign policy, where the Senate has far less leverage. The indications are that he will try to restore relations with traditional U.S. allies – thus avoiding the risk of trade war with Europe, but the real test will be what Biden does with the import tariffs on Chinese goods that Biden inherits. Expect some kind of signal very early in the Biden presidency.
2. W(h)ither Covid?
The announcement of a new strain of Covid-19 that is more infectious – if no more dangerous – than the original version may knock some of the froth off markets between now and the new year, but 2021 is likely to start with a ‘Goldilocks’ scenario priced in – a scenario where the pandemic ebbs due to vaccine distribution and the arrival of spring, but authorities still keep the stimulus taps as wide open as possible, to prevent what the central bankers are calling ‘scarring effects.”
Moderna (NASDAQ:MRNA) has joined Pfizer-BioNTech in receiving Emergency Use Authorization for its Covid-19 drug, and all subsequent candidate vaccines will help the ability of national healthcare systems to roll out protection more quickly. The idea is that rapid protection of the most vulnerable will give governments greater confidence to keep the rest of the economy more open, while relying on a high take-up rate among the population.
Yet over 20% of Americans asked by the Pew Institute earlier this month said they would probably refuse the vaccine, a number that could rise significantly higher if any or all of the approved drugs start showing unexpected and negative side effects. In addition, it should be remembered that mutations in the virus – of which there are likely to be several – may make it harder to banish for good – even if there is no sign as yet that the novel strain detected by U.K. scientists will be resistant to those drugs currently under development.
3. The rebound in travel, leisure, dining
But let’s assume that the vaccine roll-out goes as planned, what kind of comeback can be expected next year? The consensus is all for a sharp rebound, but the industry – perhaps with one eye on further support from the public purse – is far from sanguine. Companies as diverse as Delta Air Lines (NYSE:DAL) Booking (NASDAQ:BKNG).com and Hilton Worldwide Holdings (NYSE:HLT) all shied away from giving any form of guidance in their latest quarterly updates.
The International Air Travel Association expects the industry to lose another $40 billion next year, on top of the $120 billion this year, and only expects air travel numbers to return to 2019 levels in 2024. Tui (DE:TUIGn), Europe’s biggest tour operator, says 2021 will be a “transition year”, with traffic only returning to pre-pandemic levels in 2022.
The powers-that-be will surely move heaven and earth to make sure that signature events as the Tokyo Olympics and the Euro soccer championships take place as planned. And Tui’s numbers indicate that pent-up demand for vacations is immense. At the other end of the scale. The bar and restaurant business will surely revive wherever owners can apply good hygiene. But it’s still hard to see the circus of trade fairs, conferences and other networking events whose whole point is to multiply social contacts as getting their mojo back before 2022.
4. The Inflation Scare
Watch out for the great inflation scare in spring. That’s when the prices for oil and discretionary goods and services really plummeted last year, which means that inflation rates, which measure prices from against their year-earlier levels, will lurch sharply higher.
To be sure, the European Central Bank and others have already indicated that they’re on the lookout for what should only be a blip, given that the pandemic recession has left massive output gaps across advanced economies which will keep real inflationary pressure subdued for some time. All the same, there’s a risk that some of the headline numbers will be enough to weaken conviction that central banks can run an ultra-loose monetary policy forever. It would be surprising if the more hawkish-minded of the central banker crowd can stop themselves from talking at least of a possible need to tighten policy some time in the future, especially if industrial commodity prices like copper, oil and cotton continue to rally as they have done in the last few weeks.
5. Antitrust War on Big Tech
2021 is set to be the year when the antitrust war on Big Tech cranks up big time. The realization has dawned on regulators that a handful of big platform companies – Alphabet (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Facebook (NASDAQ:FB) - are exercising more control over what consumers read, watch and buy than is healthy for individuals and for society at large.
Their use of data to influence users’ choices, their acquisitions and their policies as regards the content on their networks are all coming under increasingly intense scrutiny, as evidenced by a flurry of investigations and suits in recent weeks by the Federal Trade Commission, the Department of Justice and over 40 state attorneys general – to say nothing of the European Union.
Arguably none of the recent actions has the look of a knockout blow. The companies have obvious counter-arguments that have already withstood scrutiny. And some of the actions may be undermined by suspicions of partisan motives. All the same, with so many various authorities throwing legal punches around, it seems only a matter of time before one or more of them connect properly.
6. Brexit
If 2021 is at risk of getting off to a rocky start, then that’s partly due to the Brexit saga, which finally has to reach a resolution on January 1, when an 11-month transition period that allowed the two sides to pretend that the U.K. hadn’t actually left the bloc, comes to an end.
At the time of writing, the two sides have agreed a minimal deal that guarantees that neither side will face tariffs and quotas on their goods trade, at least to start with. That may change if Britain uses its new-found sovereignty to diverge from EU product and labor standards. Companies will nonetheless have to provide documentation regarding the origins of cross-border shipments, a degree of extra bureaucracy and cost that is likely to hold growth back, at least in the near term.
However, the deal is largely silent on services, leaving the U.K.'s key financial services industry in particular at the mercy of any future changes in European attitudes. The deal was rushed through the U.K. parliament on Wednesday, but still faces scrutiny by European parliaments.
7. Iran
One area where President-elect Biden will be able to make his mark unencumbered by the Senate is in relations with Iran. Biden has indicated he wants to return to the 2015 UN-approved Joint Comprehensive Plan of Action (JCPOA) that committed Iran to reducing its enrichment of nuclear fuel, eliminate its stockpiles of medium-enriched uranium and sharply curtail its enrichment capability.
Donald Trump’s withdrawal from the accord in 2018 was part of a policy of “maximum pressure” that initially crippled Iran’s oil exports, but there have been signs this year of its increasing success in getting around U.S. sanctions.
Returning to the JCPOA would smooth the way for a loosening of sanctions and a much bigger increase of Iranian oil exports, which remain well below their historical levels. This at a time when the world oil market still hasn’t worked off the big rise in stockpiles this spring, when oil sometimes literally couldn’t be given away.
Absorbing that extra supply could be tricky. OPEC and allies led by Russia will still be holding 6.5 million barrels a day of production capacity offline as of January, and no-one will be in a hurry to give up market share to Iran at a price that doesn’t cover most of OPEC members’ spending needs.