By: Muhammad Abdul-Wakeel
Mubasher: Next year is expected to see major economic events including Trump losing election, Hungary leaving the EU, USD dropping 30% against gold, and WTI crude oil reaching $85 per barrel.
The Danish investment bank, Saxo Bank, presents a set of wild scenarios for 2020 which could send a shockwave through the global economy in its report ‘10 Outrageous Predictions for 2020’.
“Extending the last decade’s trend into the future would mean a society at war with itself, markets replaced by governments, monopolies as the only business model and an utterly partisan and a highly fragmented and polarised public debate,” chief economist at Saxo Bank, Steen Jakobsen, said.
1. Reversal of fortune cuts gold-to-oil price ratio in half
Weak demand, trade wars, and the rise of the green trend have been weighing on oil prices, boosting gold, as investors shifting to the traditional safe haven.
Adding fire to the fuel, the revolution of shale oil ballooned demand, making the US the world’s largest oil and petroleum liquids producer. Moreover, OPEC and Russia could find sustaining agreed upon output cut challenging.
It is worth noting that Rystad Energy predicted that oil production from non-OPEC countries would surge in 2020.
However, Saxo Bank expects US shale oil production will slow down, enticing OPEC and Russia to announce major cuts to their production, which may coincide with the next round of Aramco’s IPO which helps to ensure the desired valuation from investors outside Saudi Arabia.
“The market is caught off guard and the scramble to cover shorts while adding fresh longs eventually sees WTI crude oil return to $85/b. The gold ratio is halved from its 2019 high of 30 down to 15,” Saxo Bank’s report said.
2. In energy, green is not the new black
Gold will not be the only victim of recovered oil, as the increase in oil prices will steal renewable energy’s thunder.
“In 2020, we see the tables turning for the investment outlook as OPEC extends production cuts, unprofitable US shale outfits slow output growth and demand rises from Asia once again. And not only will the oil and gas industry be a surprising winner in 2020 — the clean energy industry will simultaneously suffer a wake-up call,” Saxo Bank said.
3. The sudden arrival of stagflation rewards value over growth
Soaring deficits, followed by a recession will force the Fed to adopt a very fat balance sheet, especially to fund desperate infrastructure plans by Trump’s administration aimed at raising his odds in the 2020 election.
Unfortunately, wages and prices soar which – coupled with a shortage in resources and skilled labour – will boost inflation.
“Rising inflation and yields, in turn, spike the cost of capital, putting zombie companies out of business as weaker debtors scramble for funding. Globally, the USD suffers an intense devaluation as the market recognises that the Fed will only accelerate its balance sheet expansion while keeping its policy rate punitively low,” the report maintained
4. ECB folds and hikes rates
The European Central Bank’s (ECB) new president Christine Lagarde will make up her mind in early January 2020 and announces that the ECB’s monetary policy has overreached its limits and that maintaining negative deposit interest rates for a longer period had a disastrous impact on the European banking sector.
Following Lagarde’s bold declaration, the ECB will increase rates on 23 January 2020. By the end of the year, rates will reach a slightly-positive figure.
5. Democrats win a clean sweep in the US 2020 election, driven by women and millennials
Saxo Bank’s report makes another wild expectation, predicting that the Dems will secure a tight grip on US politics in 2020, winning the presidency and both chambers of the Congress.
The Democrats’ trump card will be the maturing millennial generation of 20-40-year-olds which is far more liberal demographic.
6. US President Trump announces America First Tax to reduce trade deficit
Triggered by defeat in polls ahead of next year’s election, Trump will decide to resort to a radical solution that could boost its credit.
The incumbent US administration will cancel all existing tariffs and impose the America First Tax, which will force American corporates to favour US-based production under the ‘fair and free trade’ principle.
“This brings stinging protests from trading partners for what are really just old tariffs in new clothes, but the administration counters that foreign companies are welcome to shift their production to the US to avoid the tax,” Saxo Bank’s report commented.
7. Asia launches new reserve currency in move away from US dollar dependence
Defending themselves against the weaponisation of the US dollar, Asian economies will launch a digital reserve currency backed by Asian Infrastructure Investment Bank (AIIB).
The AIIB’s new reserve asset will be called the Asian Drawing Right (ADR) which will be equivalent to $2, making it the world’s largest currency unit. The USD will decline 20% against the ADR within months and 30% against gold.
Saxo Bank added that “local economies multilaterally agree to begin conducting all trade in the region in ADRs only, with major oil exporters Russia and the OPEC nations happy to sign up due to their growing reliance on the Asian market.”
8. South Africa electrocuted by ESKOM debt
The South African government announced that it will increase its budget to support the troubled the country’s electricity public utility ESKOM which put the national economy in an unfavourable position.
According to the World Bank estimates, South Africa’s external debt accounts for more than 50% of the emerging economy’s GDP.
Saxo Bank predicts that “the ESKOM fiasco may be the straw that will break the back of creditors’ willingness to continue funding a country that hasn’t had its financial or governance house in order for decades.”
9. Sweden breaks bad
Troubled by its immigration policy and overstretched social services, the Swedish economy will suffer next year. The small open economy will be sensitive to the slowdown in the global economy.
10. Hungary leaves the EU
After the initiation of the EU Article 7 procedure against Hungary, the 15-year relationship between the country and the bloc is in danger.
Hungary’s leaders maintain their tighter restrictions on free media, judges, academics, minorities and rights groups, justifying this policy on the ground that they are aimed at protecting the country and its culture from mass immigration.
The “unsustainable status quo” will further worsen Hungary’s relations with the EU which may result in a ‘Hungarexit’.