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"We are at a crossroads on many fronts: globalisation, geopolitics & economics"

The beginning of a new easing cycle based on "ugly" economic realities is only a few months away, according to Saxo Bank’s outlook for the December quarter.
"We are at a crossroads on many fronts: globalisation, geopolitics & economics" "We are at a crossroads on many fronts: globalisation, geopolitics & economics" "We are at a crossroads on many fronts: globalisation, geopolitics & economics" "We are at a crossroads on many fronts: globalisation, geopolitics & economics" "We are at a crossroads on many fronts: globalisation, geopolitics & economics"

The strong dollar could be its own undoing

Staff reporter

Chief economist and CIO Steen Jakobsen said the December quarter could go one of two ways.

The first would see a dampening of volatility by a less aggressive US Federal Reserve, more active easing in China, and a compromise on the European Union budget, while the other would result in a further escalation of tensions between all three areas.

"I would not bet against the latter into Q4, but I remain confident that we stand only a few months away from the beginning of a new easing cycle based on ugly realities, not the hope expressed by politicians and often market consensus," he said.

Jakobsen said the US economy seemed to have peaked for now, with the one-off effects of unfinanced tax cuts, repatriation of capital, and fiscal spending likely to peter out as 2018 came to a close.

He pointed out the US housing market was already showing signs of strain as the higher marginal cost of capital started to materially impact future growth.

"We are clearly at a crossroads on many fronts: globalisation, geopolitics and economics," Jakobsen said.

The bank looked at equities, foreign exchange, macro, commodities and fixed income in the outlook.

Looking at commodities, head of commodity strategy Ole Hansen said the direction of many would continue to be influenced by the decisions made by the US government over the past six months, such as the trade war with China and the sanctions against Iran.

"The trade war, especially with China, shows no signs of easing. At least not before the November midterm elections, with Democrats generally favouring Trump's tough stance towards China," he said.

"Accepting this fact, China has shown little interest in trying to find a solution before the US elections. While growth and demand-dependent commodities, such as industrial metals, have been left reeling, energy prices have risen sharply in response to the November introduction of US sanctions on Iran's oil trade."

He said the risk of a prolonged trade war and rising oil prices due to sanctions could see the global economy struggling to maintain its long-held positive momentum.

"The combination of rising energy prices and the hitherto strong dollar, not least against many emerging market currencies, will act as an unwelcome tax on consumers," he said.

Speaking of the strong dollar, Saxo head of FX strategy John Hardy said if the US dollar and US rates both rose further, US markets then the US economy and ultimately the global economy were at risk of breaking.

There was a particular risk to emerging markets that took part in US dollar-denominated borrowing via the Fed's zero-interest-rate policy years after the global financial crisis.

"The direction of the US dollar remains the key driver of action as we go from a late US monetary policy cycle to potentially the end of that cycle in a more concentrated and immediate timeframe than the market or the Fed anticipates. The US dollar and US rates can only rise so far from here before something - or rather more things - break," Hardy said.

On equities, Saxo said changing dynamics could be setting the stage for a comeback in value stocks.

On the macro front, the bank said young demographics could not be ignored, while China's shift towards looser policy and stimulus efforts had contributed to push the credit impulse.