Q2 Outlook: You can't fight gravity
Video length: 2 minutes

Q2 Outlook: You can't fight gravity

Kay Van-Petersen
Global Macro Strategist

Summary:  The global policy panic seen in Q1 saw the world unable to escape its QE dependence, with central banks pivoting to a degree of support that will remain in place until structural failure. The “QE for life” era, though, holds some implications of its own, and we see China’s gravitational pull as perhaps the key factor.

There has been a major shift in the global macro backdrop over the last six months and it has huge structural significance for both Asia and the world as a whole. The crux of the matter is that central bankers, led by the Federal Reserve and European Central Bank, have unequivocally failed to attain escape velocity from quantitative easing. The gravitational pull of addiction to loose money has led to pampered stock and bond markets, as well as some remarkable events.

Fed chair Jerome Powell’s Fed now seems to belong to vice-chair Richard Clarida (who, it should be noted, was previously at one of the biggest bond shops on the planet). The Fed hiking cycle, meanwhile, is down for good with a wooden stake through its heart – we went from expecting two hikes in 2019 (after a December 2018 downgrade) to no hikes. Additionally, there is already an end in sight for the balance sheet unwind, despite its having barely got through 10% so far.

Mario Draghi’s ECB has also moved firmly back into stimulus mode in a year that was supposed to see it look to raise rates. The “hawkish Fed” and the “hawkish ECB” must now be classified alongside the unicorn and all the other mythical beasts.

No one should be surprised that we couldn’t escape this QE world, particularly given debt levels that are now north of $250 trillion as compared to $175 trillion before the financial crisis. The speed with which we have been pulled back in, however, was surprising. The implication is now that, until a “great debt reset” (read: haircuts, restructuring and a debt jubilee) that could still be five to 10 years away, it’s back to QE for life.

Does the level of debt and excessive money printing in the system matter? No and yes... or rather, it doesn’t matter until it does. It’s just like any bad habit: at first, it’s just a taste here and there, then it becomes a regular occurrence and some time after that, there is notable structural change. We will need a global recession before we see the great debt reset but until then, the QE-for-life theme has quite a few implications.

For one, it will continue to extend this business cycle even further, despite the fact that we are presently in the tail-end. The 2020 US elections, Tokyo 2020 and the Chinese Communist Party’s centenary in 2021 – not to mention a likely forced fiscal spend in the Eurozone at some point – will carry overall global growth.

Taking the world back to looser monetary policy and lower yields will be bullish for bonds and equities. Expect new cyclical lows in bond yields (for example, and as we have long mentioned, Australian 10-years are already taking out the 1.81% lows). Structurally speaking, I also expect a much weaker USD over the course of the year. The world needs a weaker USD to flourish and what the world needs, it tends to eventually get.

Lower yields mean less financing and a lower cost of capital for global companies and emerging market corporates. A structurally weaker USD will remove years of headwinds for EM assets. It should also be a tailwind for higher commodities, which are generally supportive of EM as whole.

For China, there are a lot of moving parts. The market is still anticipating some form of resolution on the US trade deal, although repeated delays of the long-awaited Trump/Xi summit could be bearish in the short term. It’s also worth bearing in mind that the market is acting like there will almost certainly be a deal. As such, a no-deal scenario would be a disaster for equities – we could see a retest of the December lows – and a boon for higher bond prices and a stronger USD.

There is another gravity effect in China over the long term and that’s the multi-generational move from a positive current account economy (outwardly driven) to a negative current account economy (inwardly driven). This is all part of Beijing’s plan to be more reliant on domestic consumption than on exports to the rest of the world. That’s over around $1 trillion of Chinabound inflow over the next three to five years; to put that in context, it’s over +7% of China’s 2018 GDP of $13.5 trillion.

Saxo Chief Economist and CIO Steen Jakobsen made a very contrarian call towards the end of last year that Chinese equities were likely close to the bottom and that they would outperform in 2019. The 30%-plus gains from the lows in the Shanghai Composite show that he was precisely correct – not just on direction, but more importantly on timing.

It’s also worth noting that while we are not far from all-time highs in US equity indices (we have already seen new all-time highs in certain stocks), Shanghai at around 3,100 is still around 40% lower than its 2015 high of 5,180. We also have huge China equity inclusions in the MSCI EM index coming that will take us from 5% to 20% (in +5% increments slated for May, August and November. The bounce in Chinese equities is likely telling us that, for now at least, we’ve seen the worst in the underlying Chinese economy and could be in for some positive surprises, particularly in Q2’19 growth data.

Beyond this, there are significant structural inbound flows headed to the Chinese equity and bond markets as China continues to open up to the world. If you have not done so already, check out Saxo’s China Bond Connect to access the $12 trillion-plus Chinese bond market

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 https://www.home.saxo/en-au/legal/.

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 (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

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 www.home.saxo/en-au/about-us/awards

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.