In a follow-up to their financial Outlook for 2009, Saxo Bank, the online trading and investment specialist, has launched its first Quarterly Outlook for the global economy.
Compiled by Saxo Bank’s Strategy team, the short analysis examines the global economic outlook for the forthcoming quarter and will also look at whether the first quarter predictions that were made by the Strategy team in their Yearly Outlook were correct.
– Macro update
In the last two months the Saxo Bank Global Business Cycle Indicator has declined at a slower rate, suggesting that 2009 World GDP per Capita growth will be around -2.5%. Saxo Bank still believes that write-downs from Eastern Europe and Chinese deceleration will be the primary drivers for negative growth and deflation for the rest of the year. Fix your borrowing costs now, if possible.
– Equity update
We are still negative on equities and since our base scenario for the economy is deflation we do not find equities cheap right now. In this Quarterly Outlook we have lowered our original estimates for earnings growth in the Yearly Outlook on the back of our macroeconomic view.
– FX Update
The main theme this quarter has been competitive devaluation, which was kicked off when the Bank of England announced its debt monetization policies. The British Pound has been the biggest “winner” in the race to the bottom. The United Kingdom has a terrible fiscal position and is therefore one of the least able to afford the massive stimulus efforts it has announced. But the pound is now so cheap that the UK is incredibly competitive and when things stabilize perhaps later this year the pound could be in for a rebound.
– Quantitative easing to accommodate drunken sailor spending
The logical destination of the Fed’s Quantitative Easing (QE) policy will be that the central bank will end up owning all its government’s debt in order for the QE policy to work. The worst case scenario will be a destruction of the private capital market for sovereign debt – the best case scenario will have no effect.
“Unfortunately, the leading indicators leave no hope for a nearby recovery and we still believe that write-downs from Eastern Europe and Chinese deceleration will be the primary drivers for negative growth and mild deflation for the rest of the year,” says David Karsbol, chief economist, Saxo Bank.
“The G20-communique delivered by Gordon Brown promises a broad range of initiatives that are very much in line with the drafts already leaked to the press before the summit. They may instigate increased liquidity for some time due to the Herculean money printing efforts on the part of central banks but the interference by the public sector and the enormous costs will choke off market dynamism and end up having the complete reverse effect of what the G20 intended.”
“G20 could, as predicted, not reverse the leading indicators and in addition, the money supply figures are not a cause for celebration,” continues David Karsbol. “Stocks will continue to suffer from earnings revisions and downgrades. We maintain that stocks could go significantly lower and our target for S&P500 is 500 within 2009.”
“When this happens, we ought to have hit rock-bottom. We have noticed that the Fed, SNB and BoE have begun on Quantitative Easing programs, but one should remember that the experience from Japan is not impressive. We do not expect these activities to have any lasting impact on the interest rates.”
L.D.