What will 2021 look like for commodities, equities and the dollar?

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When Jim O’Neill, former chairman of Goldman Sachs Asset Management and a former U.K. treasury minister, posts his thoughts on what 2021 may bring for equities, commodities and the dollar, it is worth taking a few minutes to listen.

Few economists have his level of both academic and practical experience in global financial markets. Over the decades, he has been proved more right than wrong.

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Bull or bear for commodities, equities

The premise of his post is simple: will 2021 prove to be a bull or a bear market?

Spoiler alert: he believes it will be a bull. However, he says it won’t be with the same trajectory as the recovery in 2020 has seen.

To the downside, he sees risks from a slow rollout of vaccines. After huge hype, the vaccines have raised expectations of an early end to the pandemic.

Countries that have struggled to cope with testing and tracing, such as the U.K., may struggle to roll out an effective vaccination program. Organizationally, the two are not so very different in their challenges.

Inflation concerns

O’Neill also cites a cautionary caveat about inflation.

While he doesn’t feel the probability of rising inflation is high, if it were to creep up maybe due to a faster recovery than anticipated and policymakers were to tighten fiscal and monetary policy earlier than anticipated, it could cause considerable disruption to what remains a fragile recovery.

The media is awash with concerns about overvalued equities and tech bubbles. However, O’Neill sees a market shift from tech to a more normal and broader market focus, not least because big tech is coming under increasing scrutiny and stronger-than-expected legislation could prompt a correction in values.

‘Whatever it takes’

Governments appear to be committed to maintaining a “whatever it takes” policy of loose fiscal and monetary policy for the foreseeable future. That type of thinking could possibly extend into 2022 or even 2023, in order to support the recovery.

However, in the process, it will have the effect of supporting equities.

China, the dollar

For commodities, so much depends on China.

While the Chinese stimulus measures have led the charge for commodity prices this year, the impact is likely to weaken as stimulus measures wane during 2021.

On the positive side, though, O’Neill sees a weaker U.S. dollar – in general with plenty of volatility along the way – during 2021 will be supportive of commodities.

So, more of the same — or at least of what we have been seeing this second half of the year.

Drivers have evolved, with the vaccines offering real hope of an end date. But with expectations rollout to reach over 60% of populations — to approach herd immunity — may not happen as quickly as everyone hopes.

Nevertheless, optimism will likely carry markets through such disappointments. If proved right, O’Neill’s vision of 2021 is about as good as it gets after the trials of this year.

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