Saxo Bank, an international award-winning investment firm,has unveiled its highly anticipated Q4 2023 Quarterly Outlook, providing a comprehensive analysis of global markets. This report covers a wide spectrum, including equities, FX, currencies, commodities, and bonds, while delving into essential macroeconomic themes impacting investor portfolios.
As we enter the last phase of the year, Saxo believes that the overall outlook is that spending is likely to slow, and the US fiscal cycle is turning from tailwind to headwind. The world may indeed have reached ‘peak rates’, says Steen Jakobsen, Saxo’s Chief Investment Officer, providing a once-in-a-decade opportunity to go for long bonds.
We are either at a four-decade opportunity to lock in rates at cycle high or at an inflection point where we have a full paradigm shift to a Schumpeter moment of creative destruction in economic policy via government overreach.”
“In an economic environment where real rates are too positive, there will be a fallout from sectors and consumers with financing needs. This will particularly impact green transformation companies such as offshore wind developers, as their projects’ economic value goes deep into the red under current interest rates.”
Commodity sector supported by peak rates, tight supply focus
Strength in the commodities sector, forecast in Saxo’s Q3 Outlook, is set to extend into the final quarter of the year, according to Saxo’s Head of Commodity Strategy, Ole Hansen. The weakening economic outlook in Europe and the US, and to a lesser extent China, continues to be more than offset by supply concerns – not least in the energy sector.
“The OPEC+ group of producers’ active supply management has proven extraordinarily successful, thereby creating an elevated and price-supportive level of tightness across crude and fuel-based products.”
In precious metals, Hansen maintains a bullish view on gold, along with silver and platinum – with the yellow metal “eventually reaching a fresh record in the coming months”. The timing of this will remain very dependent on US economic data, however. “As we wait for the FOMC to turn its focus from rate hikes to cuts, […] we are likely to see continued choppy trade action.”
Equities: Higher cost of capital is getting painful
The fight against inflation “has raised the cost of capital to levels that have triggered open cracks in the global economy,” says Saxo’s Head of Equity Strategy, Peter Garnry. This, in turn, shines a spotlight on the fragility of the green transformation – potentially one of the biggest catalysts for lower interest rates outside a weakening economy, “as fast decarbonisation will only happen under a lower interest rate environment.”
Elsewhere, Saxo’s artificial intelligence theme basket – consisting of 20 AI-related stocks – is valued at a forward equity valuation that is 33% above the Nasdaq 100 Index, and almost twice as expensive as the MSCI World Index.
“If bond yields decline from here due to a slowdown in economic growth, then it is not certain that this lower discount will help AI-related stocks, as their sensitivity is much larger to the growth outlook is much larger and thus AI-related stocks carry some of the highest risks in Q4.”
FX: King dollar and its far-reaching repercussions
As most central banks appear to be at the end of their tightening cycles, FX markets will be waiting to see which will be the first to switch over to an easing cycle, and how relative rate cut aggressiveness will play out.
Saxo Market Strategist Charu Chanana sees several risks to the consumer in the fourth quarter, “with the erosion of pandemic savings and the start of student loan repayments weighing on household budgets. This weakening of the US economy could bring rate cut expectations forward from mid-2024 for now, weighing on the USD.”
In the meantime, the USD continues to be strong, and “with the increased stagflation risks in Europe and the UK, combined with a structurally weak Chinese economy hit by balance sheet recession dynamics, the USD could extend its momentum, despite a pricing of ‘peak rates’ and rate cuts in 2024.”
The road to a bond bull market is paved, although challenges remain
According to Saxo’s Senior Fixed Income Strategist, Althea Spinozzi, the last quarter of the year will see stagflation deepening on both sides of the Atlantic, while elevated inflation throughout the rest of the year and into 2024 will require central banks to maintain a hawkish bias.
“Within this framework, it is safe to expect a steepening of yield curves through the last quarter of the year on both sides of the Atlantic, as markets consider how long rates can be kept at current levels before the cutting cycle begins.”
However, Spinozzi warns that while rate cuts are bullish for short- and long-term bonds, the period that precedes it, given the ongoing, and uncertain inflation outlook, may not be as positive for long-term bonds. Indeed, “longer-term sovereigns become appealing once inflation has no chance to rebound,” and “better opportunities to add duration to one’s portfolio will emerge towards the end of the year when central banks might be forced to ease the economy.”
