MarketDeal24.Com – The trade conflict between the United States and China will continue to weigh on the world economy and Donald J. Trump will keep on pushing the the Federal Reserve to keep the economy going as he prepares for re-election. Those factors and the thorny issue of relations with the United Kingdom post-Brexit will combine to frustrate the European Central Bank’s efforts to stimulate the euro zone. Oil prices may fall unless OPEC and Russia do more to weigh in crude production, meanwhile in the U.S., Netflix will fight with Disney, Apple and others to defend its position in an ever-broader Streaming War. Here are the main issues presented that will keep on having impact on the global market throughout the year 2020.
No Cessation in Sight to the United States – China Struggle for Supremacy
The ongoing protracted trade spat between the worlds two largest economies United States and China have hobbled the world economy almost single-handedly in 2019 is likely to unsettle global markets on 2020 too.
The International Monetary Fund (IMF) estimated in October that the import taxes imposed by both sides, and the far-reaching uncertainty they have given birth, will shave $700 billion of value off the global economy next year, the equivalent of 0.8% of global GDP.
The end result may be less severe, given the visible progress in discussions earlier in December, in which China consented in principle to raise its purchases of U.S. farm goods in return for a partial roll back of import tariffs on some goods it exports to the United States. There is still no date for a deal signing ceremony, and neither side has published a draft text of the said deal, but tariff cuts agreed last weekend by the Chinese authorities look designed to smooth the way for it being done early in January.
However, even after that, most existing levies will remain intact. As long as key issues of contention such as intellectual property rights and government subsidies are resolved by China, a return to the status quo ante seems highly unlikely, while other fronts of engagement – notably Hong Kong, North Korea and Taiwan – could flare up at any time.
That’s especially apparent now that the Democratic Party’s presidential candidates are hinting a willingness to confront China on issues from trade to human rights and technological supremacy – showing that whoever is in the White House by the January of 2021, the trade war – in some form – will still be going strong.
Election to Cast a Long Shadow over The Federal Reserve
The United States Presidential election in November will cast a long shadow ahead of itself in the months running up to it – a shadow that will cover the Federal Reserve among many others institutions.
Opinion polls and bookmakers give President Donald Trump an even chance of re-entering into White House (assuming he survives the current impeachment process), something that would pave the way for another four years in which trade and fiscal policy are the central factors for market developments, with the Federal Reserve reduced to the role of cushioning any shocks – whether to the upside or downside – that those policies generate.
If Trump decides to skip escalating the trade war, then U.S. inflation is likely to rise under the influence of a tight labor market and a $1.2 trillion budget deficit. Upward pressure on U.S. lending rates will start at the long end of the bond market, while fresh presidential browbeating via Twitter will keep U.S. short rates anchored, as the Fed reluctant to take action that may become controversial in an election year.
If, by contrast, Trump feels the need to energize voters with aggressive actions toward China (or indeed the EU, Mexico, Canada or elsewhere), then the Fed may have to pull out another ‘insurance’ rate cut.
The Battle for Streaming Supremacy
The year 2020 will start with Reed Hastings’ Netflix defending a first-mover advantage – it currently has just under 160 million subscribers across the globe and is very much the first name that comes to mind for on-demand video streaming.
However, that position is under constant threat from wealthy competitors, with both Apple and Walt Disney having launched rival services in November. Disney, with its unparalleled back catalog and its dominance of live sports programming, is set to be a particularly tough on competitors. CEO Bob Iger says he’s targeting 90 million subs by 2024. The first 10 million signed up on day one.
Comcast and AT&T will enter the fray next year: NBCUniversal’s Peacock offering is due for launch in April and WarnerMedia’s HBO Max is due in May. And as with so many other sectors, Amazon.com remains a potentially powerful and margin-pushing rival.
The good thing is that most analysts see plenty of space in the marketplace for multiple providers. The less good news is that no-one knows exactly at what price point that space starts to contract. Disney has had to undercut Netflix substantially to guarantee escape velocity for its service. Later launchers may find that problem even more acute.
And yet arguably none of the companies lining up to provide those content services has as much of a challenge as Roku, which specializes in smart TVs tailored for streaming platforms. After quadrupling in value in 2019, its shares are trading at a multiple of 15.2 times expected 2019 revenue. That might be the hardest billing of all to live up to.
Crude Oil Production Facing a New Glut
The global crude oil market is facing a difficult start to 2020, as sluggish world economic growth continues to ensure that supply grows faster than demand.
The deal earlier this month by the Organization of Petroleum Exporting Countries (OPEC) and its partners, notably Russia, to cut supply by a further net 500,000 barrels a day from January through March has assured investors that there will be no immediate glut. Even so, the International Energy Agency (IEA) says global crude stock could soar at 700,000 barrels a day in the first quarter of 2020.
“The OPEC cuts didn’t entirely solve the issue,” says Bjørnar Tonhaugen, chief of oil market research at Rystad Energy. “Instead they offer a light bandage to get through the first quarter of 2020.” After that, he says, fears of over-supply will surely resurrect.
That’s reflected in the U.S. Energy Information Administration’s (EIA) forecast of an average crude price of just over $55/barrel for U.S. benchmark West Texas Intermediate next year, and $60.51/barrel for the global crude benchmark Brent.
Those prices mean that for many shale producers in the United States, life will stay precarious as before. Their largest integrated competitors, meanwhile, face rising costs of capital as policymakers and investors pressure the sector to expose more clearly the Climate Change risks enshrined in its business models.
Pricing and capital costs means U.S. crude production growth is set to slack to 900,000 barrels a day next year, according to government forecasts. That’s down from 1.3 million barrel/day this year and 1.6 million barrel/day in 2018. For the first time in at least three years, the U.S. will not meet all incremental global demand on its own. The IEA expects world oil demand to rise by an average of 1 million barrels a day over 2020.
Europe’s Trade Trouble
The trade uncertainty will continue to have impact on the European economy, frustrating the European Central Bank’s (ECB) exit from its policy of negative lending rates, putting increased pressure on the profitability of the Eurozone banking system, and keeping a cap on the Euro in the foreign exchange markets.
Trade troubles are many, and solutions to those are few. Higher U.S. import tax on Chinese goods have deterred business investment in both countries, hitting Eurozone exports of capital goods. The EU is also the obvious next target for any new trade offensives if the Trump administration declares a war-break with China ahead of the election.
Nor is the EU likely to take recent U.S. import taxes in relation to Airbus subsidies lying down: the World Trade Organization (WTO) will likely allow it next year to levy tariffs of its own on U.S. companies in return for hidden subsidies to Boeing.
Finally, there is the fate of relations between the European Union and United Kingdom, which will leave the bloc at the end of January British Prime Minister Boris Johnson has hinted that he expects a trade deal by the end of 2020, when the transitional phase of his divorce deal is set to end. That sets the stage either for some frenzied negotiating or, more likely, a trade truce that will be done in phases, each one doing just enough to stop a disorderly disruption of trade and financial flows between the two. Even so, the threat of such a scenario will be constantly depressing confidence and demand at the margins, ensuring that Pound Sterling, too, struggles to build on the achievements of the last quarter.