2021 to be the year of the bulls – Nordea

According to the Chinese Zodiac calendar, we have entered the year of the ox. That is probably as oxish (or bullish) as it gets, and Chinese stimulus patterns still hint of an extraordinarily strong first half of 2021, while economists at Nordea are a bit more in doubt about the second half. 

The new year has begun with the dollar on the back foot and a cautious market mood. While stocks are only marginally higher, the safe-haven dollar extends its decline, with EUR/USD rising toward 1.23.

Key quotes

“We remain upbeat on EUR/USD, EM FX and risk assets in general into the start of this year and we don’t really want to question this narrative until the recovery is strong enough for both fiscal and monetary administrations to consider removing the foot from the QE/stimulus-pedal.”

“The combo of strict lockdowns and a vast number of direct transfers is, of course, optimal for tech/online stocks, but we still believe in a decent rotation story for 2021 outside of the very near-term.”

“Judging from most recent historical patterns, it could be that EUR/USD will not peak until the Chinese momentum starts to wane, which is not a story for the first part of this year. >1.25 levels could be on the cards, but it may be worthwhile considering options strategies that take profit above such levels.”

“The commodity cycle will likely continue to see tailwinds, and there is a decent probability of a continued reflationary environment when lagged effects of stimulus are paired with the potential re-opening of the service economy during the (very) early parts of the spring. This could lead to a positive demand effect on inflation, while we have so far mostly seen supply-driven inflation in parts of commodity space.”

“Currently, consensus economists expect that Fed funds rates remain at zero ‘forever’, while long bonds will have to rise. At some point, this cognitive dissonance will have to be challenged by reality, and our best take is that markets will have to re-assess the average inflation targeting regime from the Fed. Once this narrative is tested, it may also make sense to turn around on the EUR/USD bullishness, but this is not a story for the first few months of the year.”