Real money will be the next recession's main victim Real money will be the next recession's main victim Real money will be the next recession's main victim

Real money will be the next recession's main victim

Althea Spinozzi

Senior Fixed Income Strategist

Now that the first part of the year has finally come to an end, it’s time to accept the trend of the past six months in order to be better equipped for what’s to come.
The signals we are gathering from financial markets are alarming, and we are worried that evidence supporting an imminent recession is piling up even though the global economic backdrop continues to be supportive of equity markets, US inflation is around the Federal Reserve’s 2% target, and unemployment is incredibly low. 

The factors that lead us to believe a recession is coming, however, are as follows:

Financial markets are overleveraged. In the US, nonfinancial corporate debt stands at 30% of  GDP, an all-time high and a figure whose growth comes thanks to the Fed’s ‘taper tantrum’ of the past few years. With interest rates kept at historic lows for a decade, credit conditions have become incredibly lax and lenders have been pushed to agree to lower interest payments and issue covenant-lite loans to be able to participate in the credit market. 
Now that the Fed is tightening policy and there is $10 trillion in debt set to mature in the next five years, it becomes clear that as interest rates rise, refinancing is going to become increasingly more difficult. 

There is a risk of overtightening from an incredibly hawkish Fed. This risk emerged as Jerome Powell took the reins and indicated that the Fed is getting ready to hike twice this year and four times in 2019.  Again, this will hit overleveraged companies first as they will be unable to refinance their debt at convenient interest rates. This could also produce a liquidity squeeze in emerging markets as the US dollar continues to be strong and the value of their foreign exchange reserves diminishes. Already this year we have seen Argentina, Turkey, Bahrain, and other EM countries ensure currency crises, and as market conditions become tighter, it might be difficult to contain these events within isolated volatility episodes, as they can easily trigger a selloff within the bond space.

The more we review these potential causes of distress, the more we realise that the effects of a recession would be completely different from the ones seen 10 years ago.

While the crisis of 2008 centred on the stability of the financial sector, a recession today would not place banks in a similarly difficult place as the rules of the game have changed since the financial crisis. Banks worldwide now have to comply to strict stress tests which aim to keep them well capitalised and able to absorb market shocks. Traders’ books have been shrinking, but banks have been managing their books efficiently, allocating investment in strategic corporate loans.
Although banking regulations and requirements appear to have successfully cleaned the system of dangerous investments, however, data suggest that overall leverage has increased since 2008.

If banks aren’t holding that risk, who is?

The short answer is real money investors. Loose monetary policy in the US, Europe, and Japan has unwittingly pushed investors towards riskier assets as lower interest rates spurred risk appetite. Investors who previously stuck with bonds are now active in equities and may even be willing to take on leverage and participate in the volatile FX market. 

If a credit-driven burst happens now, the pain will be felt most directly by real money investors.

Although quantitative easing was used to heal a system that had become unsustainable, its side effects may yet prove more harmful than the disease. One of the most obvious such effects can be seen in how low borrowing costs have pushed companies and governments to borrow ever-increasing sums without considering that the easy money would one stay stop flowing. Now that the Fed is tightening and financing conditions have changed, a credit-driven recession is likely.

This week’s FOMC minutes will be closely watched as many market participants are fearful of an inverted yield curve and believe that, as stress in the credit market intensifies, the only solution will be for Powell to slow down and reconsider the hiking path outlined last month.

The good news is that a recession is not likely until 2020. We are still in the so-called late economic cycle and there remain good opportunities out there; we do not yet see a need for turning defensive and jumping into typical capital-preservation trades.


Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (
- Analysis Disclaimer (
- Notification on Non-Independent Investment Research (

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000

Contact Saxo

Select region


The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.