Copenhagen - Uncertainty and erratic moves will be the norm rather than the exception reports Saxo Bank, the online trading and investment specialist, in its economic outlook for the third quarter of 2011. The second half of 2011 will be volatile and the uncertainty almost as great as during the financial crisis.
The most probable outlook for Q3 is that the world extends monetary stimulus across the global economies. This will bring marginal higher growth but also increase the burden on fiscal payments and a need for structural changes. Any long-term solution needs to be forward looking and involve an agenda for dragging Europe out of the low growth stalemate. A solution based on buying more time will only take us closer to the feared full blown Crisis 2.0.
With this in mind three major themes are identified:
• The EU and US debt issue: time is up and decisions are needed
• Asia/China growth slows down as they turn to fighting inflation in earnest
• Social tension needs addressing – otherwise not only do we lose the young generation but we also fail to provide a sense of unity, the very basis for sustainable growth, peace and prosperity.
Commenting on the outlook, Steen Jakobsen, Saxo Bank's Chief Economist said:
“The financial crisis was an opportunity missed for the policymakers and politicians alike. Only in times of distress are there consensuses for change but world leaders instead chose to pile more debt onto debt, merely transferring risk from the financial sector to the public sector. Two years later, and almost to the day, such policy and economic errors have compounded with almost nothing to show in terms of key parameters for long-term economic growth, like housing and employment.”
“Demonstrations in the centres of Madrid, Athens, Lisbon and MENA are clear signs that something needs to be done to realign implemented policies with the required need for structural change. What the world needs to move forward is an agenda on growth and jobs, not on how to buy more time. The final six months of 2011 will be volatile and the only guarantee we can and will give is that uncertainty and erratic moves will be the norm rather than the exception.”
The Quarterly Outlook Q3 2011 focuses on the following areas:
General Market Comment
As the Saxo Bank Strategy Team expect the world to extend, stimulus across the global economies is the most likely outlook for Q3. This will result in acceptable growth but also an increased burden on fiscal payments and a need for structural changes.
Saxo Bank comments that the recent batch of weaker-than-expected economic data at the end of QE2 has jolted the markets into risk-off mode. Uncertainty is running high, but from a fundamental perspective the analysts' views are mostly unchanged since the Q2 Outlook. Saxo Bank stated then that slower growth was ahead, but not a new recession.
Saxo Bank likens the outlook for the major economies for the next couple of quarters to a horse race in which the horses have all been maimed or sickened. Picking the winner is a choice between which horse looks the least likely to collapse before the finish line. The U.S. economy headed south while the Federal Reserve must honour its QE2 exit deadline at the quarter end. Europe’s periphery is still a festering sore in need of fresh bailouts, Japan’s economy has been desperately disrupted by a natural disaster, and China is headed for a landing of one kind or another as it faces down inflationary overheating and a property bubble.
The hangover for equities over the last three months, following the disaster in Japan, has turned into disappointment over economic data. Concerns about Europe’s sovereign debt situation with Greece on the verge of default further fuel anxiety. These events have reduced short-term visibility for stocks but the upward trend still prevails. Despite the Bank's slight downward revision to global economic growth, the ever benign valuation in equities means that it continues to be modestly optimistic about this asset class. The analysts expect it to emerge from the fog as the economy picks up speed in the second half of the year.
Oil markets will be watching economic developments closely due to concerns about OPEC’s recent failure to address a potential shortfall during the second half of the year. OPEC seems to be split between those who have spare capacity and those who do not. Apart from political differences, Saudi Arabia was looking to increase supplies amid autumn forecasts of a two million barrel-per-day deficit. The other bloc, led by Iran, which needs high prices and is already operating at full capacity, argued that demand for oil is set to soften due to weaknesses in the U.S. and other economies.
The futures markets have now come round to Saxo Bank's belief that rates will be on hold well into H2 2012 and probably 2013.
Saxo still feels QE3 is a distinct possibility in Q4 2011 or Q1 2012 - sooner, rather than later, in the event of dramatically weaker equity markets.