Saxo Bank's 10 Outrageous Predictions for 2017
Denmark (ots/PRNewswire)
Will this be the year when China exceeds growth expectations, Brexit turns into Bremain, the Mexican peso soars and Italian banks turn out to the best performing equity asset class?
Saxo Bank, the online multi-asset trading and investment specialist, has today released its annual set of 'Outrageous Predictions' for the year ahead.
Continuing in the tradition of making a selection of calls aimed at provoking conversation on what might surprise or shock the investment returns in the year ahead this year's predictions cover a range of scenarios, including a Chinese growth rebound, an Italian bank rally, Brexit giving way to Bremain and the EU's willingness to change in the face of populist backlash, among others. The Outrageous Predictions should not be considered Saxo's official market outlook, it is instead the events and market moves deemed outliers with huge potentials for upsetting consensus views.
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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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.
9. 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%.
10. 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 EUR1 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-2 017
https://www.tradingfloor.com/publications/outrageous-predictions
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