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Saxo Bank’s Q2 Outlook paints a gloomy picture of global markets



Online trading and investment specialist Saxo Bank published its second quarter outlook for global markets and trading ideas for equities, FX, currencies, commodities, bonds, and a range of central macro themes impacting client portfolios.

Steen Jakobsen, Chief Economist and CIO at Saxo Bank stated:

Steen Jakobsen Saxo Bank
Steen Jakobsen, Saxo Bank

The virus outbreak has set three major macro impulses in motion: a global demand shock, a global supply shock and an oil war that has forced prices to multi-year lows. This final development will result in an enormous destruction of capital and, soon, structural unemployment.

Central banks, meanwhile, try to move in quickly with ‘support’ in the form of rate cuts and liquidity provision. For a company or fund relying on credit for some portion of its operations, this may help in terms of the future cost of financing liabilities. But it does not help the price of the equity or credit on the asset side, causing significant numbers selling assets that are often highly illiquid to deleverage across the board.

The shakeup we are seeing here in Q1 will change the landscape of investment and risk tolerance going into 2021. It will also change the long-term allocation model away from a 60/40 bond/equity allocation to proper hedging through commodity exposure and long volatility.

Saxo Bank office

Saxo Bank warns that equities face the worse outlook since 2008. The current coronavirus crisis comes just after the US-China trade war put things out of balance and slowed growth. Supply and demand shock come together with oil price war between Russia and Saudi Arabia. The bank expects in the worst-case scenario, that the S&P 500 could decline to 1,600.

Peter Garnry, Head of Equity Strategy, commented:

Peter Garnry
Peter Garnry Source: LinkedIn

As equity prices reflect the future and growth prospects, they are the most sensitive to current crisis. Investors are desperate to get out and cash in on years of fat profits.

We are in the phase where policymakers will throw a lot of stimulus against the economy, including various lending programmes from governments and the extension of tax payments. With the Fed’s two panic cuts taking the rate to 0.25% all major central banks are also now effectively zero bound.

The bank states that the current crisis differs from the 2008 because instead of a relatively weak USD and supercharged FX liquidity, currently we have strong USD and lower liquidity levels. The bank’s estimate is that we need the USD to lower to call an end to the equity and risk bear market.

John Hardy, Head of FX Strategy, said:

John Hardy Saxo Bank
John Hardy, Saxo Bank

The trigger of this credit crunch is of course the coronavirus outbreak, but the severity of the fallout is a product of a financialised global system made so incredibly fragile by leverage and the QE medicine used to alleviate the last crisis.

Currency markets are likely to transition through to what may prove a U-shaped recovery with a bumpy bottom into 2021. The pressures and drivers we’re experiencing now are very different from those of the recent and pre-2008 past, when carry and investment flows in a globalised financial system were the chief focus.

Saxo Bank predicts that China will be the first to exit the global crisis.

Kay Van-Petersen, Global Macro Strategist, stated:

Kay Van-Petersen
Kay Van-Petersen

We need to reset expectations around fundamentals and earnings as policymakers deal with the challenge of the triple threats: a demand shock, a supply shock and the destruction of capital in the energy market.

While China has led the world with regard to the economic slowdown we’re experiencing – talks suggest Q1 China GDP could be in the -10% to -20% range – we are also likely going to be entering a quarter or two where that slowdown ripples across the eurozone and the US. Therefore, the paradox here is that from Q2 China’s growth is likely to accelerate as the rest of the world decelerates.

In Saxo Bank’s Q2 outlook, the bank states that the second quarter is likely to focus on the dramatic drop in demand for commodities such as crude oil, industrial metals, agricultural commodities, etc. The current crisis may cause the supply out look to become demanding.

Ole Hansen, Head of Commodity Strategy, said:

Ole Hansen
Ole Hansen

Miners and producers may begin to feel the impact of staff shortages and breakdown in supply chains. The impact of lower fuel prices is being felt from agriculture to mining as it drives down input costs. However, the potential risks to supply could see some markets find support sooner than the demand outlook suggests.

The demographic shift of baby boomers retiring against a setting of global financial issues could mean a longer impact of Covid-19 and end of the secular bull market

Christopher Dembik, Head of Macroeconomic Analysis, commented:

In the coronavirus era, Governments are ready to do ‘whatever it takes’ to mitigate the crisis. We are moving from ‘bailout the banks’ in 2008 to ‘bailout SMEs and anything else’ in 2020.

Christopher Dembik
Christopher Dembik Source: Twitter

The huge fiscal stimulus that is coming is likely to increase inflationary pressures in months to come. Contrary to consensus, we doubt that the coronavirus is a temporary market shock. We think that the COVID-19, along with demographic factors will precipitate the end of the secular bull market.

In our view, demographics are the ultimate indicator of how the economy and the market will evolve decades in advance. Retirement of the baby boomers will happen at the worst time ever for the stock market, when other structural factors are already affecting the macroeconomic outlook. Loose monetary policy, for example, has dramatically increased debt-to-GDP ratios — which are now at unsustainable levels — and diverted capital from productive investment. The amount of debt in the system, especially in the private sector, is dragging down productivity and the economy overall.

The heightened cross-asset volatility is a result of the global public health crisis and financial market condition. Volatility must be lowered and investors should consider how portfolios are diversified.

Eleanor Creagh, Market Strategist, said:

Eleanor Creagh
Eleanor Creagh Source: Twitter

What is currently a liquidity crisis could fast become a solvency crisis as the simultaneous shocks to demand and supply weigh on the balance sheets of otherwise solvent SMEs. This crisis is about too many to fail, as opposed to too big to fail. Distressed entities desperately need a lifeline to maintain wages, rents and other payments that do not stop as economic activity grinds to a halt.

Although stimulus packages may ease downside risks to the economy, for markets to really recover the onus will be on reduced COVID-19 transmission rates, increased immunity and a clear containment of the outbreak. As yet, relative to previous crises, valuations have not become outright cheap. Nevertheless, hope springs eternal both in financial markets and humanity, so there will come a time for bargain hunting. At that juncture, we likely enter a different investment paradigm. The extraordinary fiscal stimulus, a de-globalisation tailwind and recovery in economic activity will bring at the very least higher inflation expectations, and long-term bond yields may eventually rise. Perhaps we’ll see an opportunity to rethink diversification beyond the traditional 60/40 and a comeback for value, cyclicals and commodities.


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Saxo Bank's Q2 Outlook paints a gloomy picture of global markets

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