Check out the key picks for this week by SaxoStrats team

FX FOCUS

Dollar direction

  • Eventually higher rates bite the US economy, unless the tariffs/strong dollar/rising oil price bites first. USD strength being driven by US growth relative to ROW
  • Until position of dominance growth wise is reversed USD will remain strong.
  • 2019 will be a different story as monetary policy more restrictive and fiscal stimulus fades.
  • eg if China were to execute a large stimulus package and China growth>US growth but likely a 2019 story
  • Trade your view with Saxo [DXZ8 - US Dollar Index Future Dec 2018]

EU leaders may push toward a final Brexit deal at a Brussels summit - GBP

  • Outlook for incredibly uncertain - landmine trade.
  • EU negotiations previously a degree of drama and theatrics - so a compromise can't be ruled out. Not base case but can't rule out no deal Brexit/second referendum, markets certainly are complacent to this and the fact that any deal needs pass parliament. To trade - Prefer to wait for a trend to be set rather than predicting the binary outcome.
  • A breakdown in talks could severely undermine GBP-USD, but is unlikely, in our view
  • Significant negative skew suggests that investors remain nervous about UK-EU negotiations and are hedging against significant GBP-USD downside that could ensue under a no-deal outcome.
  • Trade your view with Saxo [GBP/USD Spot]

AUD

  • Could see strength this week on a stronger jobs number but remain with sell on strength bias.
  • AUD remains vulnerable as a China proxy and as US/AU yield differentials widen
  • 70 could be closer than we think. Trade war likely to intensify. More strength in USD to come as yields higher in Q4, dip into below 70 cent territory.
  • Trade your view with Saxo [AUD/USD Spot]

U.S.-Saudi tiff, impact on oil/energy markets

  • Oil market not retaliation - risky game to play with Trump on the other end of the bargaining table. cut in production could trigger release of US reserves and be counterproductive.
  • Currently do not know full impact of Iran sanctions and corresponding production cut - the outcome will determine where oil prices sit at year end. $70 or $90
  • Demand side of the equation likely to become more prominent if oil prices keep rising. For EM also need to factor in the currency side with currency depreciation prices in local currency terms keep rising. As the Rupee has depreciated India is currently paying in rupees the same price/barrel as in 2014 when USD price was 110.
  • Price increases above $90/barrel are likely to accelerate demand destruction.
  • Trade your view with Saxo [CLZ8 – Light Sweet Crude Oil (WTI) Dec 2018]

Contrarian

  • Short US and long RoW - moderation in US growth over the coming months.
  • Higher rates will eventually bite the US economy, unless the tariffs/strong dollar/rising oil price bites first.
  • Two of the most underappreciated risks heading into Q4 of 2018 among investor consensus are the cyclical peaks in corporate profit growth and corporate profit margins – adopt a defensive posture as the associated rotation out of the domestic Momentum, High Beta, and Growth style factors could be quite violent given current positioning.
  • Trade your view with Saxo [DXZ8 - US Dollar Index Future Dec 2018]

EQUITIES FOCUS

3Q earnings season underway

  • In Q2 S&P 500 companies printed their best sales growth y/y since the GFC. Based on the Q3 figures so far the growth rate is lower but it's too early to say as only 28 companies have reported.
  • Will likely see another push up in US equities in Q4, Q4 earnings are expected to be good. Upside is likely to be capped as fast forward into next year its looking dangerous.
  • US outperformance won't continue into 2019 - as profit margins peak given rising input costs – 1) higher rates, 2) oil prices, 3) wages, 4) tariffs and a 5) fading fiscal stimulus
  • Longer term US trade policies are not friendly to continuing long term growth as companies cant invest for the long term in uncertain environment.
  • Trade your view with Saxo [YMZ8 – E-mini Dow Future Dec 2018]

Portfolio

Positioned more defensively. Still invested in equities, expected real rate returns are still higher for equities compared to fixed income if buying stocks for capital appreciation. Yield on a 2yr note or 1yr bill or mortgage bonds for a conservative investor is getting to levels where can compete with stocks dividend yields

  • Rotating out of high PE names. As the discount rate growth stocks vulnerable = setting the stage for a comeback in value stocks.
  • Prefer a more cautious positioning, trimming momentum factor exposure and overweighting healthcare and consumer staples. Also increasing value factor exposure Underweight software and semis, autos.
  • Don't think it's all over for equities but we are certainly reaching a point where need to be more cautious. Historically this inflection point comes at 4-4.5% - corporate debt saturation so high now could be closer to 3.5% as repayments on debt bites into earnings.
  • Trade your view with Saxo [ZNZ8 – 10-Year Treasury Note Future Dec 2018]

US earnings will do well. The US market likely hits a higher high before year end, next rally could be shorter lived. Following a final push equity markets will succumb to ever increasing headwinds and Significantly lower earnings growth next year - earnings growth in 2019 of about 10%.

  • Trade your view with Saxo [YMZ8 – E-mini Dow Future Dec 2018]

Weekly Most Traded A-shares*

Stock CodeStock NameSaxo CodeAverage Daily
Value Traded RMB
(11 - 17 Oct)
601318 CH EquityPING AN INSURA-A601318:xssc4,820,693,000
600519 CH EquityKWEICHOW MOUTA-A600519:xssc3,307,642,800
000651 CH EquityGREE ELECTRIC-A000651:xsec1,975,978,200
000063 CH EquityZTE CORP-A000063:xsec1,778,993,200
000858 CH EquityWULIANGYE YIBI-A000858:xsec1,773,232,280
600036 CH EquityCHINA MERCH BK-A600036:xssc1,661,392,800
000001 CH EquityPING AN BANK-A000001:xsec1,564,041,400
000629 CH EquityPANGANG GROUP -A000629:xsec1,363,442,560
600887 CH EquityINNER MONG YIL-A600887:xssc1,321,844,200
603799 CH EquityZHEJIANG HUAYO-A603799:xssc1,308,222,440

* Source: Bloomberg