Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
You can access both of our platforms from a single Saxo account.
Macro Digest: Don't ignore the distress signals of the market
Steen Jakobsen
Chief Investment Officer
Summary: Inflation seems to be the only factor that can change the direction of the stock market. Energy prices are now trading between 50% and 500% higher than average, depending on the fuel, and this represents a tax on consumption and business profits. We expect falling profit margins from here, but also a fragile risk market as interest rates looks ready to move higher to counter this cost pressure. This article looks at valuations, energy and the realisation dawning on market: the physical world is too small for the ESG focus and Green Transformation.
- What: There is need to reduce risk into Q4 – Stagflation light is a real risk.
- Why: In the official narrative, inflation is moving from “transitory” to “temporary” (but is actually structural in our view) with waning real growth as energy prices are out of control. We are talking about 2-3 times more expensive energy costs for consumers and companies. This will hit margins and is a tax on growth.
- What to do: No reason to panic, but reduce risk or buy protection. Long volatility or Long puts.(Talk to your account manager or GST support for ideas…) Alternatively or in addition, look to buy Commodity Indices which continue to perform under supply constraints and rising energy demand. (See the example below).
- What else: Seasonality is bad in September and October and the German election could lead to Bund yields rising, Middle East (Iran, etc.) could see crude oil above $80.
- Saxo Strats views: We are moving to reduce only on equity exposure until further notice and buying PUT on US indices….
Chart: our internal valuation model. Below is a Z-score model derived from seven different measures of the stock market valuation. This is to avoid bias in data, but this chart is clear: the market has never been more expensive, ever!
On top of this several chart lines are at risk …. Most of them originating from the pandemic outbreak lows in 2020…..
Then this from Kim Cramer Larsson - our in-house chartist:
“With its close below support at 34,714 Friday Dow Jones Industrial Average Index has established a bearish trend. RSI below 40 is confirming the bear picture and we could see lower levels over the next week or so.
To reverse the downtrend a close above 35,510 is needed. First warning of that scenario unfolding would be for the Index to break back above the rising trend line its broke last week.
However, what is interesting is that the Future has not yet confirmed a bearish trend. The Future closed just above its support at around 34,572 Friday and has started the week on a positive note. However, RSI dipped below 40 indicating negative sentiment meaning the support could easily come under pressure next few days. A break and close below could fuel selloff down to strong support at around 33,285.”
Courtesy of Kim Fournais, this long-term SPX chart:
The Buffett Indicator: The Tobin Q valuation
Cost pressures / Inflation remain very underestimated:
courtesy @Ole S Hansen (OLH).
And then there are inflation expectations, which have seen in a seismic shift by some measures, including the New York survey of 1- and 3-year forward inflation expectations. Fed officials often refer to whether inflation is well-anchored – in our view, it is rapidly becoming downright unhinged. A further rise in rates to reflect these higher inflationary outcomes and rising expectations is coming and soon, driven by supply chain disruptions and this massive increase in energy input prices. I advise several companies, speak in front of even more, and none have hedged this move – not a one.
Invesco DB Commodity Index Tracking Fund:
Conclusion:
Only inflation can stop this equity market, it’s that simple. And we know the response function from policymakers as well. If or when this market drops, then ever large fiscal and accompanying monetary interventions will be mobilized and most of it tilted to more ESG and Green Transformation priorities. What policymakers have failed to account is the premise we outlines months ago: The physical world is simply too small for the attempt at upgrading infrastructure, fighting inequality with ESG and fighting climate change with the green transformation. Just this week, the UK is paying up huge amounts to fire up coal plants to keep the lights on, and tonight Illinois will probably halt the formerly scheduled decommissioning of the state’s nuclear power stations. A friend of mine commented that “Policy makers are now more fearful of blackouts than climate change”… Reality struck this week in energy and just maybe in risky assets.Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer