Saxo Bank, a specialist in the area of complex online trade and investments in a wide range of assets, has published its annual list of outrageous predictions for next year.
This time, the bank’s predictions include a wide range of scenarios, including recovery in China, growth of Italian banks, Britain’s 180 turn and EU’s desire to change in response to populism risks. These predictions are not Saxo Bank’s official outlook on developing events. They are unlikely events and market movements that sharply contrast with consensus.
«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,» – said Steen Jakobsen, Chief Economist at Saxo Bank.
Changes always come after crises. In 2017, the world will wake up from its illusions only to realize it can no longer go back to the way things were. This applies to expansionism of central banks and fiscal consolidation of governments, which is typical for post-crisis periods.
«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,» – the economist added.
Here are ten outrageous predictions by Saxo Bank:
1.GDP growth rates in China will reach 8%; SHCOMP to hit 5,000
China knows full well there is nowhere left to develop manufacturing and infrastructure. It has reached the end. Through massive fiscal and monetary stimulation, China will open capital markets. This will allow the giant to switch to a consumption-focused growth model. This will help the economy’s growth rate reach 8% in 2017. Euphoria caused by private consumption stimulating the economy will result in Shanghai Composite growing twice as much in comparison with the level of 2016 and exceeding 5,000.
2.Desperate, the Federal Reserve to fixate 10-year bond yield at 1.5%
Dollar’s exchange and interest rates in USA will begin growing painfully quick in 2017. The new president’s fiscal policy will increase 10-year bond yield to 3%, causing panic on the market. Desperate, the U.S. Federal Reserve will follow the example of the Bank of Japan for curve control. But the Federal Reserve will fixate yield for 10-year bonds at 1.5%, thereby basically launching a new QE4 programme. Sales will cease on stock markets and developing markets. World markets, on the other hand, will demonstrate the most rapid week growth in the past seven years. Voices of critics will rally in one massive cry caused by central banks.
3.High-yield default rate to exceed 25%
With long-term average default rate for high-yield bonds reaching 3.77%, jumping during the US recessions of 1990, 2000 and 2009 to 16%, 10% and 12% respectively, its rate may reach 25% in 2017. Interventions of central banks are nearing their end, governments around the world are switching to other fiscal stimuli, which inadvertently leads to growth of interest rates (except for Japan), steeping the yield curve dramatically in the process. 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 will not happen; Britain will return
Rise of populism on both sides of the Atlantic will make European leaders more disciplined, forcing them to switch to a new and more constructive level and teach them to agree with one another. In the process of talks, the EU will agree on 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. Britain will remain in the EU, the Bank of England will raise the rate to 0.5%, EUR/GBP will drop to 0.7300, making a callback to 1973, when the country first entered EEC.
5.Doctor Copper to catch a cold
Copper benefited the most among raw materials after elections in USA. Nevertheless, the market will realize in 2017 that it will be difficult for the new president to realize his promised investment projects, and demand for copper will not grow at all. Facing growing discontent at home, Trump will increase protectionism and introduce trade barriers that will not be welcomed by developing European markets. World economy growth rates will continue to decline and Chinese demand for industrial metals will continue to decline as the country moves more towards consumption-focused 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.Bitcoin to benefit from the wave of cryptocurrencies rise
Fiscal expenditures in USA will grow tremendously under Trump. Budget deficit will rise from $600 billion to $1.2-1.8 billion. This will provoke 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.Healthcare reform to trigger panic in USA
Healthcare expenditures in USA reach 17% of GDP, when compared with 10% in the world. Meanwhile, medical services remain unaffordable for an increasing share of the country’s population. The initial relief rally in healthcare stocks after Trump’s victory will quickly fade after 2017. Investors will understand that the state administration has no plans to go easy on the healthcare sector and instead plans to launch massive reforms. 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.Mexican peso to grow in spite of Trump, especially against CAD
Markets have seriously overestimated Donald Trump’s true intentions and ability to deal with Mexico. Once they realize this, Mexican peso will grow tremendously. Canada will suffer, because higher interest rates will provoke a credit crunch on the housing market. Canadian banks will buckle under, forcing the Bank of Canada into quantitative easing mode and injecting capital into the financial system. Additionally, CAD will start underperforming as Canada enjoys far less of the US’ growth resurgence than it would have in the past because of the lasting 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 to become stock market leaders
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 €1 trillion of infrastructure investment, reinforcing the integration of the region and prompting capital inflows into the EU.