Greece’s seeming hour-by-hour descent into chaos at the end of the second quarter has fashioned an intensely uncertain framework casting markets at the mercy of headline risk.
It is with that ever-changing caveat that Saxo Bank publishes its Q3 Outlook ahead of the Greek referendum on EU membership which, as things stand, will take place July 5.
The outlook for Q3, therefore hangs in the balance, depending on the degree of fallout and EU peripheral contagion should Greece vote ‘No’. On the one hand, optimists say that the European Central Bank can simply print more money to cover the enormous debts to creditors. But on the other, a Greek ‘No’ vote presents the significant risk of contagion across the EU periphery and even global uncertainty that could send markets into a tailspin on the usual trajectory of global risk-off events.
The Bank therefore stresses that much of what follows is contingent on the Greek “fire' burning out quickly and warns of a false start to the Fed’s rate hike cycle:
• We are entering the final phase of the multi-decade lows in yield and inflation, but a rise in both this year may prove a false start before the real deal in 2016.
• All eyes are on Janet Yellen Fed’s slow march to policy normalisation. Will Fed rate hikes be a case of “one-and-done” or the start of a “normal rate hike cycle”?
Saxo Bank says that while current economic data is not supportive of proposed rate hikes by the U.S. Federal Reserve, the Yellen Fed could hike anyway, a move that it may eventually regret.
Meanwhile, for the GCC, the focus will remain on oil revenues. Ole Hansen, Head of Commodity Strategy at Saxo Bank says,
“The loss of revenues from oil will, according to the IMF, trigger a 23% decline in GCC exports from 2014 to 2015 and this impact is currently being felt across the region. But a stable oil price during the past couple of months has also brought a degree of calm back to the hydrocarbon-dependent economies of the Gulf.”
Opec’s expectations that demand will continue to rise thereby over time help remove the supply glut and trigger higher prices has driven the regions belief that a bounce back is coming, according to Ole Hansen.
”Such a bounce however is according to our expectations not going to be seen before well into 2016 as the potential for rising supplies from Iran and Libya will prolong the time it will take before the market balances itself.
Ole Hansen forecasts a return to $100+ is not expected for the foreseeable future and this should help the region to focus on attracting and building other sources of revenue.
”Large scale infrastructure spending across the region not least in Saudi Arabia is required to transform these countries into a connected and modern economy. The Middle East’s ideal location as a hub for trading between Asia, Africa and Europe needs also to be exploited to the fullest extent while Dubai’s ability to attract financial institutions from around the world not least from emerging economies such as India and China could further increase the region’s importance as a centre for trade finance.
Against this backdrop, Saxo Bank key trading ideas for the next quarter are:
Oil prices and gold have settled into a range of late. But oil bears are hoping that rising Opec output and rising US inventories after the peak demand season will allow prices to move lower, while a rate hike in the US could be a buying opportunity for gold says Ole Hansen, Saxo’s Head of Commodity Strategy.
Hansen expects the third quarter will be when the Fed’s chair Janet Yellen begins to turn off the liquidity tap and maintains his call for gold to finish the year at $1,275/oz., somewhat above the current consensus.
The US economy is slowly but steadily getting back on track after the Q1 doldrums and the question is no longer if the Fed will hike rates, but when. The answer to that question depends on who you ask. The market seems to stand on two legs, more or less split between September and December says Mads Koefoed, Saxo Bank’s Head of Macro Strategy.
Koefoed also considers Europe saying the European Central Bank president Mario Draghi also has a handful on his plate in Q3, but it is of a different nature as a Greek euro exit looms large while sovereign bond yields have surged with the German 10-year rising to more than 0.8% from less than
0.2% in Q2. He sees growth in the region staying robust in the second half of 2015 albeit without much pickup.
Head of Saxo Bank’s FX Strategy John Hardy says with the Eurozone still embroiled in difficulty, the USD may resume its upwards track – but this hinges on the numbers and whether the US recovery really is here to stay. After a quarter mostly spent consolidating previous heady gains, the US dollar will demand the market’s full attention in the third quarter of this year. It may rally afresh, provided US economic data and Federal Reserve rhetoric point towards a September rate move – in what would be the first rate hike in more than nine years.
• Fixed Income
Saxo Bank’s Head of Fixed Income Trading Simon Fasdal says the recent rise in global bond yields has already established itself as a major theme in financial markets. He also considers what could go wrong this quarter. Besides Greece, there are no real signs of any critical market triggers, and now with the holy trinity for Europe – a lower oil price, a weaker euro and ECB bond-buying – this should boost the economy and send inflation expectations and yields into an upwards spiral in Q3.
There is a time for going on the attack in markets and there is a time for manning the defences says Kay Van-Petersen, Asia Macro Strategist at Saxo Bank. A likely highly volatile trading environment in Q3 definitely marks this out as a protect-what-you-have three months.
Kay Van-Petersen says the markets are entering a very challenging time with the first rate hike potentially coming through from the US which would be the first hike since 2006. He notes that the global economy is experiencing increased dislocations as the US raises rates while most of the rest of the world has an easing bias.