Political uncertainty and growing negative sentiment against the political elite noted in relation to the elections in USA and the upcoming referendum about UK’s possible exit from the European Union are two of the largest risks that threaten the stability of the financial market, as noted by Saxo Bank.
«Eight years into the financial crisis, employees take home their lowest pay cheques-to-GDP in history, meanwhile, corporations enjoy their highest earnings before tax compared to GDP ever. We also have the lowest capital expenditure in history together with the lowest level of productivity. This unhappy trinity explains the rise of the far left and the far right as they represent the furthest distance you can travel from the political elites. Voters seem to think that chaos is better than ‘more of the same. We are calling this new paradigm the breakdown of the social contract,» – comments Steen Jakobsen, Saxo Bank’s Chief Economist.
Saxo Bank’s outlook for major asset classes in the second quarter of 2016:
Entering the second quarter, we expect our theme of the broken social contract to be felt most intensely in sterling as the UK barrels toward a potential Brexit. What that means in practical terms is far from certain, but in immediate currency terms, it will likely have great ramifications – particularly with regard to the volatility of sterling exchange rates.
It also appears as if Q2 may be the time-frame in which the market begins to ponder the likelihood of a Trump presidency and what it would mean for the U.S. economy and more specifically, the dollar. There is a strong risk of USD weakness going into the election if polls show a strong likelihood of a Trump victory, merely due to the fact that Trump is the definition of an unknown quantity – again, volatility is virtually the only guarantee.
The pressure building on Europe to solve some of its imminent problems could easily flood into bonds once again, with Brexit fears and anti-austerity movements on Europe’s periphery potentially leading to market disquiet. We remain cautious on financials going into Q2 on account of very low yields, increasing (and still unknown) regulation, higher non-performing loan ratios and most of all, low-tech business models.
Commodities are finally showing signs of stabilisation following the brutal sell-off over the past couple of years, with gold and oil leading the charge. The buying of gold was almost non-stop during the first quarter with hedge funds going from record short to their biggest net-long positions in 13 months – strong momentum should see gold bugs reach but not breach $1,310/oz.
Fast forward one quarter and sentiment has also improved from the dark days in mid-January when Brent crude hit a 12-year low. Our preferred range for the coming quarter remains unchanged from Q1 at between $35-40/b but no longer with the risk skewed to the downside.
In a macro sense, there are several key backloaded event risks in the second quarter, including the Federal Open Market Committee meeting on June 15, a Brexit referendum on June 23, and a new general election in Spain. However, even if we will sail smoothly through the anticipated FOMC rate hike in Q2, developed equities do not look cheap at the moment – with the roughly 10% rebound from the February through weighing on valuations.
We expect Italy to produce a sharp jump in earnings as the nation’s finance industry recovers while delivering a dividend of around 3.5%. At the other end of the scale, the UK remains overvalued as tailwinds from the housing sector fade.