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Successful trader's guide to 2020
The upcoming year opens a new decade. The events of Blade Runner would have already taken place. Do you feel that the future is here? In this article, we look at the economic side of things. Will the trends we observed in 2019 continue in 2020? What will happen with the global economy? And, finally, which assets will offer the best investment and trading opportunities? Read the report prepared by FBS analytical team to find the answers to these questions.
Wrap up of 2019
It’s very important to draw lessons from experience. By looking at the major topic of the past year, you can learn things that will help you benefit in the future.
The year of trade battles
Throughout the past year, the periods of higher and lower trade tensions between the United States and China have been taking turns. The topic never left completely influencing the majority of trading decisions. The year of 2020 will begin with the parties signing the phase one of the trade deal. However, not all issues have been resolved. Some experts say that the ultimate trade peace will take 5-10 years to reach, others are talking about the perpetual trade war. We think that the new year should be calmer with fewer trade-related headlines. Investors will likely become more risk-taking and grasp the opportunity to benefit from things like oil and stocks. At the same time, remember that bad news are still possible, so the proper risk management will be necessary.
US recession fears
There were a lot of headlined related to the potential recession in the United States. Analysts noted a phenomenon called “the inversion of the yield curve”. In short, it’s a abnormal situation when it costs more to borrow money for a short period of time than it does for a longer time span. In the previous years, such inversion made the US economy contract. This time, however, the curve quickly returned to normal leaving economists guessing what will happen next.
The US economy definitely has some problems. ISM manufacturing PMI fell below the key level of 50 points for the first time since 2016. At the same time, the unemployment rate has fallen to 50-year low and NFP showed its 10-month best in November, so things may not be as dark as some doomsayers want them to seem.
Recession fears have diminished and this is good for the USD.
ECB - change in leadership
Mario Draghi, who stayed in charge of the European Central Bank since 2011 has left his post. His successor, Christine Lagarde, the former head of the International Monetary Fund, does not have experience as a central banker. For now, she gave little indication that the previous loose monetary policy will change. This should limit the strength of the EUR.
It’s hard to believe that after almost 3 years of tormenting negotiations, there finally may be some clarity about Brexit. We will remember 2019 for the departure of Theresa May and the arrival of Boris Johnson who replaced her as the British Prime Minister and then strengthened his political power by setting up and winning the general election. Johnson’s promise is to “get Brexit done” as soon as possible. The current deadline agreed with the European Union is January 31, 2020. Now the Prime Minister has the Parliament support to push through the Brexit legislation. The only question that remains are Johnson and the EU really on the same page? Any doubts about that will hurt the GBP.
2020: upcoming events
US presidential election
America will choose its new chief on November 3. Donald Trump will likely re-enter the battle on the Republican side. It’s not clear yet who will represent Democrats. Overall, Trump’s presidency has been kind to financial markets because of his pro-business approach. If he gets another term in the Oval office, S&P 500 will get a fair chance of keeping up its bullish trend.
At the last meeting, the US central bank has signaled that it expects to keep the federal funds rate on hold in 2020. Of course, intentions of the central bank may change as months go by: after all, the Fed monitors economy as it makes its decisions. We expect though that while rate cuts will remain an option, the regulator will be reluctant to consider rate hikes, as the recession fear hasn’t gone far away. Such policy will limit the upside of the USD and support the stock market.
As you can see from the picture below, major currencies spent the past year in ranges. Exotic currencies and commodities showed the biggest difference between the year’s open and close prices. Will this situation repeat in 2020? Below you will find our outlook for the key assets.
EUR and GBP
The euro’s performance will largely depend on whether or not the euro area’s economy finds bottom and starts recovering. This, in turn, depends on how Brexit goes and whether Chinese economy is fine. All in all, the EUR has better chances than in 2019, although the ECB policy does represent a negative factor. For EUR/USD the key levels on the upside are 1.1355 and 1.1478, where the weekly moving averages are located.
The pound will be driven by what happens after Brexit. Will Boris Johnson manage to reach a free trade agreement with the EU and, if so, how fast? The sooner this is done, the better for the GBP. The majority in parliament he will certainly untie Johnson’s hands. A solid economic agreement with the European Union will open the way up to 1.40/1.44 for GBP/USD. If the talks come to a standstill, the pair will once again test 1.20.
JPY and CHF
The falling demand for safe haven assets will be a negative factor for the Japanese yen and the Swiss franc. It will be necessary to perform technical analysis and confirm trends, but the idea that the JPY may weaken versus other majors may offer solid trade ideas. USD/JPY has the level of 114.00 to target on the upside. The CHF looks stronger than the JPY, so USD/CHF will meet resistance around the parity level (1.0000).
AUD, NZD, CAD
These currencies had a hard time in 2019. No wonder: the constant trade worries discouraged investors from buying. That’s especially true for the AUD and NZD, which are exposed to China. At the same time, all three have managed to find support against the USD and stabilize. Now it’s necessary to see whether they manage to overcome the long-term downtrend resistance. For example, for AUD/USD such key obstacle on the upside lies at 0.70.
The Brazilian real has been under negative pressure versus the USD due to the domestic political issues. The new President Jair Bolsonaro has to deal with strong opposition activity. Oil auctions aimed at attracting big investments failed, and attempts of central bank to intervene in the currency market angered Donald Trump who announced tariffs on Brazilian imports.
FBS analyst Hamilton Lopes is pessimistic about the prospects of the BRL in 2020: “There’s no way Brazilian currency can strengthen enough to make USD/BRL slide below 4.00 in the foreseeable future”. Although we certainly feel sympathetic to Brazilians, this knowledge offers a decent trade idea of buying USD/BRL on the dips.
Mexican economy didn’t impress investors in 2019. The primary reason for that was the continuing uncertainty about the relationship between Mexico and the United States, its number one trading partner. “The odds that the American Congress approves the free trade T-MEC agreement in 2020 have increased. If it happens, Mexican export and commercial activity will recover,” thinks Tibisay Ramos, FBS analyst in Spain and Latin America.
USD/MXN has spent the past couple of years consolidating within a triangle. Levels to watch on the downside include 18.70, 18.50 and 18.00. The strength of the USD will bring it to 19.60 and the upper limit of the triangle in the 20.00 level zone.
The Turkish lira had difficult times during the past couple of years because of political factors and economic problems. Here’s what FBS analyst Onur Erkan Yıldız has so say about his national currency: “We think there may be an improvement in Turkish inflation and unemployed rates. Still, the fundamental shift for the best is unlikely. The lira may keep losing versus the USD. For USD/TRY, we target the 6.40 level in 2020.”
Oil has been consolidating in 2019: a look at the Brent chart will show that the price swings were smaller than during the previous year. The prospects of better growth in the world’s key economies mean higher demand for oil. On the supply side of things, the Organization of the Petroleum Exporting Countries (OPEC) agreed in December to increase production cuts by 500,000 barrels a day through March 2020. Moreover, Saudi Arabia extended its own voluntary output cut. Such limitations of oil production are also positive for the price.
FBS analyst Elizabeth Belugina points out that the key event will be the March 2020 OPEC meeting in Vienna where oil producers will decide how much oil to produce during the rest of the year.
Given everything mentioned above, we can expect that in the worst case oil will at least get support in 2020. The best scenario will be the advance of Brent to the 2019 high at $75.60 and the top of 2018 at $86.70.
The global uncertainties during 2019 were pushing the price of gold up. The yellow metal rose from levels below $1,260 in January to August highs above $1,460. The main drivers were connected with the US-China trade uncertainties, the dovish Federal Reserve, conflicts between the United States and Iran, Turkey’s military actions at the Syrian border and the nuclear threats by North Korea.
The trade war relief led to the price’s consolidation. However, many analysts think that it’s too early to dismiss gold as trade tensions are far from over. Therefore, $1,600 and even $1,700 levels are still possible. Keep in mind that besides the US-China trade tensions, potential positive factors for the metal include worries ahead of the US presidential election.
American stock market had a fabulous 2019. FBS analyst Darya Bobrova sees the reason to expect the trend to continue: “S&P 500 is expected to stay above the $3,000 level. Nevertheless, the rise will not be that extensive as it was in 2019”. Among the reasons for the index’s growth slowdown we can cite slower US economic growth, reduction in stock buybacks, high volatility due to the presidential election, as well as prolonged trade risks.
Individual stocks will also draw a lot of attention in 2020. You will find some of them below.
Disney vs Netflix: the streaming war
2020 will be a battlefield for the two giants: Disney and Netflix. Both companies now offer streaming services including a multitude of movies, series, and TV-shows, and both have a strong ambition: Netflix to remain #1 as it is now, and Disney to become #1 conquering the market.
Performance-wise, Disney’s stock shows a more visible advance over the last year or so, currently being in the area of $147. Netflix is traded around $315 per share. It has been rising since October this year, but the overall downtrend is yet to change.
FBS analyst Gaspar Markosyan considers Disney a good investment opportunity. Strong business core, loyal fan base and ample expansion opportunities due to the recent Disney+ launch leave a lot of space for this stock’s growth.
Apple and the trade war
Analysts say that US-China uncertainty has been a major obstacle for Apple stock to rise to where it deserves. Now that the phase-one deal is agreed, it paves the way for Apple to realize its full potential. In addition, the company has recently announced iPhone 11 and shared its vision for the years to come – this is another growth factor for the stock. With the price of $270 per share, it has shown the best performance since 2009. More than that, some analysts predict Apple’s further growth to $325 in 2020. Obviously this is a trade idea worth looking into.
Despite the disappointing earnings in the first and the second quarters and fears related to the US-China trade war, Tesla stock did well in 2019. The company managed to stabilize its financial figures by the end of the year, and the presentation of the unique and innovative electric-powered Cybertruck reignited investor interest. Some experts say it’s “a must-buy” stock for all traders, expecting the rise above $420 in 2020. FBS analyst Ekaterina Gorbatenko sees Tesla as an attractive investment. New factories in Germany and new vehicle models may increase the overall Tesla sales. At the same time, Ekaterina recommends to check the firm’s January earnings report to see whether the new campaigns are really effective.
The report was prepared by the team of FBS analysts:
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