Maximum support for equities but watch those G7 rates Maximum support for equities but watch those G7 rates Maximum support for equities but watch those G7 rates

Maximum support for equities but watch those G7 rates

Equities 5 minutes to read
Peter Garnry

Chief Investment Strategist

The last 24 hours have sent global equities higher and if this continue until end of month we will see US equity valuation creep into dot-com bubble territory for the first time in 20 years. All engines have been fired up by policy makers and it looks like equities will continue to rally into 2020. Let’s go through the different factors at play.

Source: Bloomberg

The Fed revealed silently yesterday that they are injecting half a trillion dollars into the financial system in order to avoid a cash crunch into year-end and spiking repo rates. In other words, the Fed put is strong and alive. We are basically just waiting for the Fed to increase its monetary operations to coupons which means real QE. At the same time, other central banks are also easing pushing down rates improving the spread between fixed income and equities, which means equities look more attractive as long as the economy doesn’t go into recession.

Fiscal impulse is increasing with both China and the US increasing fiscal deficits. Japan just announced that they are increasing spending following South Korea’s decision a month earlier. United Kingdom will most likely increase spending next year under Boris Johnson as the new Conservative party is not a believer in austerity and balanced budgets. It simply doesn’t buy voters. The EU is thinking about green bonds and many EU countries have indicated higher spending next year. Overall, all fiscal engines are ramping up rpm (revolutions per minute).

The UK election clears the path for a Brexit which lowers uncertainty and increases the odds of investments coming back to the UK. But the real take away from the election is that austerity will be left behind by Boris Johnson. That’s the real change here.

OECD’s leading indicators are showing the global economy is turning around. This is good for profit expectations in 2020 and the recovery phase in the economy is typically the best period for equities against bonds with an average 9.4% excess return for equities over the period.

Lastly, the big news yesterday was the apparent breakthrough on the US-China trade deal “first phase”, but since the US media highlighted that Trump had signed off on the deal the Chinese side has been completely quiet. While it looks like a temporary truce and small tokens by each side in the trade war, the past two years have taught us that things can change fast. We don’t really know until Sunday evening where we stand on the trade issue.
Source: Bloomberg

With all the positive factors just highlighted our view is that equities will continue to rally and that we are most likely setting us up for a 1999-2000 scenario with equities melting up before things turn into an ugly correction. Our main focus now is watching the key government bond yields. We know from the past that when yields go up too much it creates a breaking point for equities. The average G7 10Y yield is 0.79% and the breaking point seems to be around 1.5%. This leaves plenty of room for bonds to fall and equities to move higher agreeing with historical observations of equity outperformance during the recovery phase.

But with more gains in equities come elevated equity valuations and especially US equity valuations look stretched, but more on that in January. With G7 10Y yield at 0.79% and global corporate bonds yield at 2.2% there is no attractive liquid alternative to equities. So for now enjoy the ride in equities and watch those rates.

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article


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 (
- Full disclaimer (

40 Bank Street, 26th floor
E14 5DA
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

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. Android is a trademark of Google Inc.

©   since 1992