Precious and Base Metals

2020 Base Outlook

February 5, 2020

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A summary of key macroeconomic expectations and assumptions for 2020*, that will thus help frame our outlook and thinking in both base and precious

 

Growth & recession risk: A tepid and gradual recovery is expected in 2020, and markets should be careful to make the distinction that slow and low global growth is not recessionary; this (fragile) “goldilocks” outlook hinges on supportive central bank policy, stabilizing data with diminished economic and trade risks BUT higher geopolitical & election risk. (Page 12)

 

Interest rates & liquidity: the coordinated dovish Developed Market CB pivot that drove risk markets in 2H’2019 is behind us.; peak negative yielding debt ($17tn) is also behind us given the pushback and rethink around negative interest rates (ultimately undermining their safe haven appeal). However, liquidity comes in various forms and while the Fed is largely expected to be on a sustained hold throughout 2020 (reinforcing our low for longer US interest rate profile), they have indicated that they're OK with letting the economy run a little hot while the (NY) Fed is likely to continue buying short duration Treasuries in 1H’2020; that should lead to a boost in inflation expectations. (Page 7-8)

 

Inflation: Inflation risks are underappreciated given the Feds stance, potential expansionary fiscal policies due to social unrest, and the cost push from ESG & protectionist trade policies. There’s a growing risk that markets shift from financial/equity inflation into real asset inflation (page 7-8)

 

Risk Sentiment: Continue to expect volatile shifts in sentiment, driven by trade and (geo)political themes creating large divergences between sentiment beliefs (positioning) and reality (data). (Page 5)

 

FX trends and the US$: Our core $ house call through 2021 implies the DXY weakening ~8%, from current levels of around ~97 while currency market volatility is overdue an awakening, already witnessed in global bonds, most commodities & equities (page 10).

 

Trade: Expect a series of 'mini-wins' and positive rhetoric within a broader framework of global protectionism; little aggressive trade escalation is expected into the 2020 US elections, but there should be no respite either, given the ‘need’ to keep US growth and risk assets buoyed. (page 11 )

 

US politics: US election risk remains underpriced with little premium being factored in, on a progressive Democratic nominee; it will become a tradeable theme after Super Tuesday in which the path toward and into November will likely become messy and disorderly keeping election sensitive assets / macro vol bid. (Page 13).

 

Geopolitics: the frequency of off-calendar geopolitical risks and events are rising, driving the need for more tactical tailrisk hedging. (Page 13-14)

 

 

*Commodities Strategists are not research analysts, and this report was not reviewed by the Research Departments of Scotiabank, nor prepared in accordance with legal requirements designed to promote the independence of investment research. Commodities Strategist publications are not research reports and should be considered for regulatory purposes as marketing communications. The views expressed by Commodities Strategists in this and other reports may differ from the views expressed by other departments, including the Research Department, of Scotiabank*

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