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Saturday, 27.04.2024, 03:56
Saxo Bank's 10 Outrageous Predictions for 2017
Steen Jakobsen, Chief Economist at Saxo
Bank, commented: "After a year in which
reality has managed to surpass even seemingly unlikely calls – with the Brexit
surprise and the US election outcome – the common theme for our Outrageous
Predictions for 2017 is that desperate times call for desperate actions.
“With change always happening in times of crisis, 2017 may
be a wakeup call which sees a real departure from the ‘business as usual’, both
in central bank expansionism and government austerity policies which have
characterized the post-2009 crisis.
“As some of our past outrageous predictions have turned out
to be far less outrageous that at first thought, it is important that investors
are aware of the range of possibilities outside of the market consensus so that
they can make informed decisions, even in seemingly unlikely market scenarios.”
It is in this spirit that we release Saxo Bank’s Outrageous
Predictions for 2017:
1.China GDP swells to 8% and the SHCOMP hits 5,000
China understands that it has reached the end of the road of
its manufacturing and infrastructure growth phase and, through a massive
stimulus from fiscal and monetary policies, opens up capital markets to
successfully steer a transition to consumption-led growth. This results in 8%
growth in 2017, with the resurgence owing to the growth in the services sector.
Euphoria over private consumption-driven growth sees the Shanghai Composite
Index double from its 2016 level, surpassing 5,000.
1. Desperate Fed follows BoJ lead to fix 10-year
Treasuries at 1.5%
As US dollar and US interest rates rise in increasingly
painful fashion in 2017, the testosterone driven fiscal policy of the new US
President leads US 10-year yields to reach 3%, causing market panic. On the
verge of disaster, the Federal Reserve copies the Bank of Japan’s Yield Curve
Control, by fixing the 10-year Government yield at 1.5%, but from a different
angle, effectively introducing QE4 or QE Endless. This in turn promptly stops
the selloff in global equity and bond markets, leading to the biggest gain for
bond markets in seven years. Critical voices are lost in the roar of yet
another central bank-infused rally.
2. High-yield default rate exceeds 25%
With the long-term average default rate for high yield
bonds being 3.77%, jumping during the US recessions of 1990, 2000 and 2009 to
16%, 10% and 12% respectively, 2017 sees default rates as high as 25%. As we
reach the limits of central bank intervention, governments around the world
move towards fiscal stimulus, leading to a rise in interest rates (ex Japan),
thus steepening the yield curve dramatically. As trillions of corporate bonds
face the world of hurt, the problem is exacerbated by a rotation away from bond
funds, widening spreads and making refinancing of low grade debt impossible.
With default rates reaching 25%, inefficient corporate actors are no longer
viable allowing for a more efficient allocation of capital.
3. Brexit never happens as the UK Bremains
The global populist uprising, seen across both sides of the
Atlantic, disciplines the EU leadership into a more cooperative stance towards
the UK. As negotiations progress, the EU makes key concessions on immigration
and on passporting rights for UK-based financial services firms, and by the
time Article 50 is triggered and put before Parliament, it is turned down in
favour of the new deal. The UK is kept within the EU’s orbit, the Bank of
England hikes the rate to 0.5% and EURGBP plummets to 0.7300 – invoking the
symbolism of 1973, the year of UK’s entry into the EEC.
4. Doctor copper catches a
cold
Copper was one of the clear commodity winners following the
US election; however in 2017 the market begins to realise that the new
president will struggle to deliver the promised investments and the expected
increase in copper demand fails to materialise. Faced with growing discontent
at home, President Trump turns up the volume on protectionism, introducing
trade barriers that will spell trouble for emerging markets as well as Europe.
Global growth starts weakening while China’s demand for industrial metals slows
as it move towards a consumption-led growth. Once HG Copper breaches a
trend-line support, going back all the way to 2002 at $2/lb, the floodgates
open and a wave of speculative selling helps send copper down to the 2009
financial-crisis low at $1.25/lb.
5. Huge gains for Bitcoin as cryptocurrencies rise
Under President Trump the US fiscal spending increases the
US budget deficit from $600 billion to $1.2-1.8 trillion. This causes US growth
and inflation to sky rocket, forcing the Federal Reserve to accelerate the hike
and the US dollar reaches new highs. This creates a domino effect in emerging
markets, and particularly China, who start looking for alternatives to the fiat
money system dominated by the US dollar and its over-reliance on US monetary
policy. This leads to an increased popularity of cryptocurrency alternatives,
with Bitcoin benefiting the most. As the banking systems and the sovereigns of
Russia and China move to accept Bitcoin as a partial alternative to the USD,
Bitcoin triples in value, from the current $700 level to $2,100.
6. US healthcare reform triggers sector panic
Healthcare expenditure is around 17% of GDP compared to the
world average of 10% and an increasing share of US population cannot pay for
their medical bills. The initial relief rally in healthcare stocks after
Trump’s victory quickly fades into 2017 as investors realise that the
administration will not go easy on healthcare but instead launches sweeping
reforms of the unproductive and expensive US healthcare system. The Health Care
Sector SPDF Fund ETF plunges 50% to $35, ending the most spectacular bull
market in US equities since the financial crisis.
7. Despite Trump, Mexican peso soars especially
against CAD
The market has drastically overestimated Donald Trump’s true
intention or even ability to crack down on trade with Mexico, allowing the
beaten-down peso to surge. Meanwhile Canada suffers as higher interest rates
initiate a credit crunch in the housing market. Canadian banks buckle under,
forcing the Bank of Canada into quantitative easing mode and injecting capital
into the financial system. Additionally, CAD underperforms as Canada enjoys far
less of the US’ growth resurgence than it would have in the past because of the
longstanding hollowing out of Canada’s manufacturing base transformed from
globalisation and years of an excessively strong currency. CADMXN corrects as
much as 30% from 2016 highs.
8. Italian banks are the best performing equity
asset
German banks are caught up in the spiral of negative
interest rates and flat yield curves and can’t access the capital markets. In
the EU framework, a German bank bailout inevitably means an EU bank bailout,
and this comes not a moment too soon for the Italian banks which are saddled
with non-performing loans and a stagnant local economy. The new guarantee allows
the banking system to recapitalise and a European Bad Debt Bank is established
to clean up the balance sheet of the eurozone and get the bank credit mechanism
to work again. Italian bank stocks rally more than 100%.
9. EU stimulates growth through mutual euro bonds
Faced with the success of populist parties in Europe, and
with the dramatic victory of Geert Wilders far-right party in the Netherlands,
traditional political parties begin moving away from austerity policies and
favouring instead Keynesian-style policies launched by President Roosevelt post
the 1929 crisis. The EU launches a stimulus six-year plan of EUR 630 billion
backed by EU Commission President Jean-Claude Juncker, however to avoid
dilution resulting from an increase in imports, the EU leaders announce the
issuance of EU bonds, at first geared towards €1 trillion of infrastructure
investment, reinforcing the integration of the region and prompting capital
inflows into the EU.
The whole publication "Outrageous Predictions for
2017" and more details can be found here:
https://www.home.saxo/campaigns/publications/outrageous-predictions-2017
https://www.tradingfloor.com/publications/outrageous-predictions