Six Early Themes for 2020

It's time to start looking towards 2020. Even with that in mind, we emphasize that the important themes now will undoubtedly change. At the start of 2019 the Fed was in a hiking cycle, but by year-end the entire world was easing (except for Sweden). The Brexit drama took an uncountable number of turns and the US President has just been impeached. Ashraf reminded us here, 2019 may be like 1998 when the Fed did 3 mid cycle rate cuts and a US president was impeached in December of that year.

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1) Circle November 3

One thing that's certain is that US politics will resonate into the year ahead. A conviction in the Senate is a remote possibility, but an election on November 3, 2020 is a certainty. The question for the first half of the year will be who will lead the Democratic party into the election. Biden currently leads in betting markets at about 31%, followed by Sanders at 21%, Warren at 15%, Buttigieg at 14% and a rematch with Clinton at 10%.

The only prediction we're comfortable making at this point is that this will be the dirtiest, most bitterly-contested Presidential election of our lifetimes. Undoubtedly, America will be left more divided and that leaves the dollar more vulnerable in the long term.

2) Oil Risks are Underappreciated

A second theme is turmoil in the oil market. We've highlighted the narrow range in crude this year and how narrow ranges often precede breakouts. The supply side is where the intrigue lies. The downside risk is that production in Saudi Arabia, Iran and/or Venezuela return to the market. The upside is more intriguing because there's a growing risk that US shale production will disappoint. There is $71 billion in US oil production debt coming due in the next 7 years and it'll be a nightmare to refinance with much of the shale industry still failing to generate profit. The industry raised money on the promise of profitability at $20/barrel but it's increasingly clear there are still no profits at $55/barrel. Rather than 5 more years of production growth, US crude volumes could peak in 2020 and leave the market undersupplied and trigger a run on energy bonds that could spread from there. Democratic candidates are threatening to ban fracking in another potential risk but at the very least there will be a debate about egregious flaring practices and that will drive up industry costs.

3) Negative Thoughts on Negative Rates

In Europe and Japan a debate is brewing about the wisdom of negative rates. The simplified version is 1) they haven't worked out how to boost inflation and, 2) the costs to banks may outweigh the benefits. It would take a crafty climb-down from central banks to reverse the policy but the debate is going to gather steam.

4) Spend the Free Bond Market Money

The other debate that isn't going to go away is on the need for fiscal stimulus. Japan rolled out yet-another package in December that Abe says will boost growth by 0.5 pp to 1.4% in 2020. Economists see just 0.3% GDP growth next year.

In the eurozone the outcome is even tougher to handicap. The consensus for growth is just 1.0% and Merkel and her austere grand coalition is losing its grip on power. With rates so low it will be tough for European nations – including the UK – to resist loosening fiscal policy. The question is: How much pain will there have to be first?

5) The Place to Be for Global Growth

The beaten-up antipodeans are the best gauge of global growth for 2020 with both at compelling levels. AUD/USD continues to flirt with the 200-day moving average and industrial metals/materials prices are rising from depressed levels. If the truce in the trade war holds, there's further value here.

6) Brexit Blues

Must we mention Brexit? The painfully short honeymoon after Boris Johnson's election win is puzzling. We would have expected some instinct towards policies to stimulate growth, or at least some reform, but instead Johnson has reverted to Brexit brinksmanship. It's dispiriting to think that UK politicians have become so adept at playing Brexit games that they've forgotten about the job of governing. Do Fitch and S&P know something that we don't, when they stated Boris Johnson will in fact extend the transition period?