Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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The Saxo G20 Risk Radar
Christopher Dembik
Head of Macroeconomic Research
Summary: Saxo's G20 Risk Radar identifies potential political risk events in the G20 countries that could have an impact on the market. It is updated on a regular basis with the most up-to-date data.
Brexit: This is certainly the most underpriced political risk in the coming months. In our view, the chances of failing to get a deal with the European Union are under 50% but we acknowledge we may be wrong and that negotiations can fail at any time, especially due to the Europeans’ hard line. Prime Minister May’s upcoming political challenge is to unite her party behind her Brexit plan at the Conservative Party Conference that runs from September 30 until October 3. The PM will give her keynote address on the final day of the event, which should give some insights about the milestones she wants to reach.
We still believe that there will be a withdrawal agreement and a transition deal for the UK to leave the European Union on March 29, 2019. However, it is likely that the political declaration on the future relation with the EU will be vague due to many pending questions on trade and Northern Ireland border. The transition period will lead to higher political tensions between London and the other European governments about Northern Ireland and long-term deal.
Talks on the 2019 Italian budget: Leading indicators and recent data such as PMI and business expectations confirm the scenario of broad growth stagnation in Q3. In our view, it will seriously complicate the budget equation in Q4. The lack of a unified message from the government over its upcoming budget along with economic weakness will certainly lead to higher volatility in the next two months, especially when the EU Commission communicates its judgment on the budget on November 30. That being said, the risk of Italy’s “hot autumn” is limited according to us. In the immediate future, the Italian government has every interest in respecting its European budget commitments as it will need very favourable market conditions to face €300 billion in refinancing in 2019.
US-China trade war: Trade war noise is an over-inflated risk. As global easing era comes to a close, investors' focus should be on the US dollar and the financial flows and not so much on trade war. As of today, the global economy has seen 14% more trade distortions imposed this year than in 2016 (the previous high of distortions implemented year-to-date). At the same time, according to Global Trade Alert, the global economy has seen 22% more liberalisation this year. Taking in consideration these data, it appears that the US-led trade war is more a short-term risk for growth and markets, but it is so far unable to derail global growth.
We still believe that there will be a withdrawal agreement and a transition deal for the UK to leave the European Union on March 29, 2019. However, it is likely that the political declaration on the future relation with the EU will be vague due to many pending questions on trade and Northern Ireland border. The transition period will lead to higher political tensions between London and the other European governments about Northern Ireland and long-term deal.
Talks on the 2019 Italian budget: Leading indicators and recent data such as PMI and business expectations confirm the scenario of broad growth stagnation in Q3. In our view, it will seriously complicate the budget equation in Q4. The lack of a unified message from the government over its upcoming budget along with economic weakness will certainly lead to higher volatility in the next two months, especially when the EU Commission communicates its judgment on the budget on November 30. That being said, the risk of Italy’s “hot autumn” is limited according to us. In the immediate future, the Italian government has every interest in respecting its European budget commitments as it will need very favourable market conditions to face €300 billion in refinancing in 2019.
US-China trade war: Trade war noise is an over-inflated risk. As global easing era comes to a close, investors' focus should be on the US dollar and the financial flows and not so much on trade war. As of today, the global economy has seen 14% more trade distortions imposed this year than in 2016 (the previous high of distortions implemented year-to-date). At the same time, according to Global Trade Alert, the global economy has seen 22% more liberalisation this year. Taking in consideration these data, it appears that the US-led trade war is more a short-term risk for growth and markets, but it is so far unable to derail global growth.
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