Optimism 2021: aren't we going a bit further?

It's no wonder that financial markets are looking to 2021 with anticipation. A slew of vaccines are rushing to fight off the coronavirus, while governments and central banks keep the economy on track.

The Dutch economy will be largely shut down for 5 weeks. The corona measures are also being tightened in other European countries. Less than a year ago, the announcement of a partial lockdown would undoubtedly have sparked major turmoil in financial markets. This time, investors shrugged and continued to buy stocks.

In the Netherlands, the AEX is slightly higher than at the end of 2019. And on currency markets it is also clear that traders have little eye for risk. Safe havens such as the dollar and the Swiss franc have lost some ground against the euro in recent weeks.

Vaccines and government support as a panacea
There is a good reason why financial markets pay little attention to the economic impact of new lockdowns. Two even. In the course of 2020 it has become clear that governments and central banks are doing everything they can to keep the economy on track. For example, through benefits that are higher than the last wage or by turning on the credit tap.

The second reason is that there are several vaccines that will hit the market over the course of the new year. So it is only a matter of time before lockdowns and other prevention measures are no longer necessary. Before the end of 2021, the economy will be completely self-supporting again, if everything goes somewhat according to expectations.

Unexpected twist
The latter is less obvious than it sounds. The corona outbreak is a very good and recent example of how things can turn out differently than you think. And then there are also more visible risks that could disrupt the balance in the market, such as Brexit.

Confidence in a good outcome has increased considerably because the negotiations have not yet broken down. But there is a good chance that the tension will rise again towards the turn of the year. British Prime Minister Boris Johnson is trying to sell his skin as dearly as possible, while at the same time avoiding the economic malaise of a chaotic exit from the EU.

Painful learning moment
Johnson maneuvers like a board member of a large retail chain, who would prefer to have his own shop. He can then negotiate with suppliers and determine the sales prices himself. But he loses the purchase discounts of a major corporation and has to compete on his own against some very big competitors (China and the United States).

The most likely scenario is that he will break away from the parent company (the EU) with reasonable agreements just before the turn of the year. Only to find out that a life as a small self-employed person is more difficult than he thought. If the pound recovers in the near future because an agreement is reached, sentiment is expected to turn when the Brexit pain really becomes visible in the course of 2021. Unfortunately, the major problems will not magically disappear after the turn of the year.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.