Fra Steen Jakobsen Saxo Bank:
It’s getting increasingly difficult to keep score on all the global risks sub-merging on the markets and our future growth presently. This is my back from holiday attempt to evaluate order of significance…
What is clear for old macro guy like me is that all the warning signal are flashing DEEP RED.
- AUDJPY – the most superior risk on/risk off is trading multi-year low @ 71.10
- Global and US yield curve is screaming recession: 2y-10y @ +4 bps, 3m/10y @-34 bps & best predictor of FED – the near-term forward is -53 bps next six quarters.
- Gold relative to everything is rising and fast despite more deflation incoming
- Earnings recession in the US and globally
- Singapore – the ultimate open economy is seeing Retail Sales & export collapse as sign of global disruption
- Germany will print 1st part of its recession numbers Wednesday and with its reluctance to ease fiscal on fiscal side will take France and Italy with into a deep European recession
- Early signs of escalation from trade war to foreign exchange open war
- We are still structurally long XAU as per our early call
- We are also continuing Overweight US fixed income – long since December hike by Fed
- Underweight Equity – as per note post July FOMC
- Short GBP, AUD (most negative credit impulse) – Long JPY, XAU – neutral: EUR, Scandies, CAD
Expected policy response:
- FOMC will cut by 50 bps in September – We keep target of 100 bps by Q4 – 50 bps in 2020 and zero in 2021
- ECB will lower steering rates and try to force EURUSD lower – in vain….
- BOE will cut aggressively through balance of 2019 – GBP to 1.15 if not 1.10
- BOJ is caught – need to change policy mix – look for signal
- Fiscal season starts in September – we expect expansionary push of minimum 0,5% of global GDP – unevenly distributed and hidden under headlines like: Green, environment, inequality fight and infrastructure overall
- Lower price of money does not work when amount of credit is falling – hence lower rates will only worsen downside in inflation
- Gold will be hoarded by central banks as world of negative yields force their hands-on asset allocation away from negative yielding government financing to zero cost Gold tangible asset – would not be surprised to see 1600 and even 1800 in big end of year rally
China CNY Fixing/Devaluation. The magic “line in the sand” of 7.00 CNY per USD was broken last week and since the Chinese have allowed their currency to slide by 2% in CNY terms. This is probably the single and most important change to world system since forever. It extends the trade war to foreign exchange and away from multi decades of controlled and G-7 coordinated deal/interventions to offset trade deficits and structural issues.
Make no mistake; This is one of the single biggest “paradigms” shifts we have had since GFC started – The G-10 is further away from multilateral agreement on anything than at any point during the last decade. Their central banks agree on lower rates (which will not work) – Now comes an outright competition to devalue their currencies. Trade war + FX war = Recession & political noise. The blame is not US or China only, clearly ECB’s only remaining option is to weaken the EUR, and look at Asia FX since last Monday’s escalation (the Trump announcement of further tariffs from September 1st)
Asia FX index – almost taking out low…. China devalue so does Asia…
German recession – this week (Wednesday August 13th – Consensus: -0,3 YoY) will confirm the first negative GDP reading out two to confirm what assets in Germany is already pricing a deep recession. This happens despite plenty of room for fiscal stimulus as Germany’s budgetsurplus runs at +1.5% of GDP. Germany in recession will accelerate negative trends in France, Italy and rest of Europe. Both Italy and France are in violation of the 3.0% Maastricht criteria as I write this – imagine where it ends with present political turmoil in Europe by December 2019
German IFO – it doesn’t get much worse than this…
DAX Index testing 200 simple moving average
Global yield curve and yield continues to reflect global recession. US 30y yield traded 209 bps – 209 bps! last night. Yield curve 2y vs. 10y is now at only 6 bps!
Brexit or rather the lack of it now risk UK in deep recession. The constant delay is now met by sizeable credit contraction impulse which to us confirms our overweight negative GBP view.
There is too much talk in the world – too much willingness to give up on existing system – ALL of the actions by central banks make things worse – driving yield lower and more and more debt yielding negative return.
The combination of Foreign Exchange “fixed model” under attack and central action to be dictates: …more of the same before we get final break-out from this utterly futile exercise of buying time.
The “productive Homo Sapiens” is all but destroyed and replaced by a digital version of empty talk but the balance of this year will shape not only macro but also politics for decades.