Q4 2022 Outlook Winter is coming

Q4 2022 Outlook Winter is coming

Steen Jakobsen
Chief Investment Officer

Summary:  The macropolitical and economic landscape has sent freezing weather in over the financial markets. How will you navigate the cold winter?

An Executive Summary 

Our outlook for Q4 2022 simply recognises the reality that winter is coming, in both the literal and figurative senses. First is the literal sense as Europe and the UK in particular brace for the impact of a winter season that will likely bring with it an economic winter. The power and gas crisis will reach peak impact due to the increased demand during winter heating season, even if prices have fallen considerably. Our macro strategist Christopher Dembik focuses on how Europe can absorb the tremendous headwinds of the energy crisis without turning the lights out entirely, with observers excessively pessimistic on the European outlook. This will include reducing demand through more efficiency, longer-term investments in nuclear, and better buildout of the necessary infrastructure for the green transformation. 

In China, our market strategist Redmond Wong notes that the focus on renewables is far less intense. China has moved to secure coal supplies amidst the spike in oil and especially LNG prices in recent quarters, preferring to focus on more efficient use of its coal-fired baseload capacity and the most aggressive buildout of nuclear power of any major economy. For the rest of developed and emerging Asia, market strategist Charu Chanana notes that the soaring prices for LNG have altered the energy security for the region, to the detriment of weaker economies. The response will come in a variety of forms, from Japan’s renewed interest in nuclear despite the 2011 Fukushima disaster, to the intriguing prospect of energy increasingly trading in non-US dollar currencies, as already seen in India’s purchase of Russian crude with roubles. Our Australian market strategist Jessica Amir zeroes in on the factors driving a renaissance of interest in nuclear energy and looks at where to find the companies and ETFs in a rather difficult-to-navigate nuclear investment space. 

Now on to the chief driver of asset valuations since the Fed’s dramatic pivot in November of last year: the trajectory of monetary policy. The coming quarter and first part of winter are likely to bring what Saxo CIO Steen Jakobsen dubs “peak tightness”. The market will finally manage to catch up to where the peak Fed rate is likely to rise by early next year, after getting it so wrong in hoping for a policy pivot toward decelerating tightening pressure in Q3. In turn, that policy tightness will lead to a recession, already on the way in Europe but spreading elsewhere next year, eventually even to the US, where the economy has proven far more resilient than the market expected.  

In equities, the emphasis from the head of equity and quant strategy Peter Garnry is on how the coming winter will inevitably drive recession risks, as already seen with the pressure on consumer and discretionary stocks. He also explores how the extraordinary pressure on Europe can drive necessary innovation that should allow the continent to come out the other side with a far more competitive economy. Still, an overriding risk for growth and equity valuations is the cost of de-globalisation, which will reverse many of the trends in equities and the supply chains that companies have hyper-tuned over the last 12 years. 

Head of commodity strategy Ole Hansen sees less drama for commodities relative to the intense volatility in the months since Russia invaded Ukraine, as ongoing supply concerns vie with shrinking demand concerns for supremacy. One interesting twist in Q4 will be how the crude oil market absorbs a halt of the Biden administration’s release of US strategic reserves if this proceeds according to plan in October.  

In the FX outlook, John Hardy, the head of FX strategy, asks whether peak tightness in the anticipated trajectory of the Fed rate hike cycle will likely also bring peak US dollar, which has provided its own wintry pressure on global liquidity and asset prices for the last eleven months.  Elsewhere in FX, will the market force the Bank of Japan to capitulate on its yield-curve-control policy, possibly setting up the yen for spectacular volatility this coming quarter? It’s also worth noting that this is the third quarter running in the massive divergence of the JPY weakness relative to Chinese yuan (CNH and CNY) strength, the latter still in relative terms despite the yuan being allowed to slip considerably lower versus the strong USD in Q3; it’s an important and tense situation that remains unresolved. 

In crypto, the market failed to revive in the quarter even with a much-anticipated Ethereum platform shift to proof-of-stake from proof-of-work. As our crypto strategists Mads Eberhardt and quant strategist Anders Nysteen suggest, the risk of a “crypto-winter” continues as global liquidity dries up on the headwind of policy tightening, not to mention the fear of stricter regulation of the space. Still, there are plenty of bright spots, with burgeoning innovation in the industry finding new applications for crypto-related blockchain technology. 

Finally, this outlook also features the usual rundown of the longer-term technical outlook for critical assets, as we revisit the critical US 10-year treasury yield chart, the US S&P 500 index and where the ultimate depths of this bear market may lie, and the EURUSD exchange rate after the symbolic parity level was reached—and then some—on the downside in Q3.  

We wish you a safe and prosperous Q4. Given the stark challenges that lie ahead for asset markets in a world beset with grinding supply side challenges, and as policymakers clamp down to fight inflation, it’s a difficult time. At the same time, it’s worth keeping in mind that opportunity and longer-term market returns rise as a function of deteriorating current asset prices. 

Explore products at Saxo

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.