Equities enter an inflection point

Equities 5 minutes to read

Peter Garnry

Head of Equity Strategy

Summary:  Equity markets are now at an important inflection point and the direction here will be determined by who wins the battle between a global recession and policy makers. Increasing evidence suggest that the slowdown is slowing increasing the likelihood of a macro turning point within the next couple of months. If the global economy avoids a recession once again it could send equities higher. But if policy makers are fighting the inevitable and the downside forces are too strong then equities will face a turbulent 3-6 months.


It’s clear from yesterday’s price action during the initial ECB press release and subsequent press conference that the market had difficulties interpreting the projected outcome across all asset classes. Trading ranges across European equities, and especially banks, and bonds. Rates were higher in both Europe and the US, and equities across the board were slightly higher carrying into Asia session overnight. But markets in general are at an important inflection point with big forces at play. It’s essentially a battle between economic forces pulling towards a recession against policy makers unleashing yet again monetary stimulus to avoid another recession.

Source: Saxo Bank
Source: Saxo Bank

Recession risk vs policy action

OECD’s leading indicators in July showed another month of decline highlighting the urging need for policy makers to arrest the slowdown. First line of defense has once again been central banks, but we are getting to the end station here on central bank effectiveness on the economy as ECB President Mario Draghi also highlighted on yesterday’s press conference. Next phase must include fiscal stimulus. The US is already engaging in massive fiscal stimulus while Europe is lagging. China is also on the bandwagon on both fiscal and monetary stimulus. One thing to note in the OECD leading indicators is that the slowdown is slowing, so to speak, which means that a turning point is probably near. Avoiding a global recession is still possible but it will be a close call. The US economy has 25-35% recession probability within the next 6-12 months.

Source: Bloomberg

The Citi Economic Surprise G10 Index rose into positive territory for the first time this year and the highest level since September 2018. With expectations now below current incoming macro data risk-on sentiment could be further supported. If macro data are stabilizing and policy action globally is strong enough, China’s credit impulse has improved dramatically since November 2018, the global economy might once again avoid a recession. It would be remarkable turn of events and opens a path for a significant upside scenario in equities.

Source: Bloomberg

Adding to the unusual times US core CPI figures (Aug) yesterday rose to highest level since September 2008 creating a difficult environment for the Fed. However, keep in mind that the Fed’s preferred CPI measure remains still well below 2%. But if inflation is showing its face while the USD is historically strong then the Fed will have to make difficult choice. Should hold rates due to domestic economic situation and risking a strong USD killing global growth? Or does it cut rates to ease financial conditions and help the global economy, but risking accelerating inflation with all its consequences? This conundrum is also highlighted in today’s FX Update.

Did Draghi deliver enough for banks?

Setting intraday volatility yesterday aside price action this morning suggests investors are happy with the two-tier system to alleviate the pain for banks due to negative rates. As we highlighted in yesterday’s equity update the lesson from Japan is that the rally continue as investors are slow at repricing the effects of the tiering system. But the lesson learned is also that the tiering system does not change structural issues that European banks face with too high operating costs, poor technology infrastructure, low loan demand, excess customer deposits and negative rates on government bonds. Structurally we remain negative on European banks despite our short-term optimism driven by the ECB decision and the steepening of the euro swap curve.

Source: Saxo Bank

Overweight Japanese equities

Rising rates, improving macro conditions and weaker JPY are all driving Japanese equities higher and reiterate our overweight stance. Valuation on Japanese equities is not stretched either compared to say US equities. But make no mistake Japanese equities are a volatile beast so any trader must be alerted to changes in JPY flow and rates. With all the stimulus being thrown at the global economy Japanese equities as a high beta play are still attractive.

Source: Saxo Bank
Disclaimer

The Saxo 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 is not intended to and does not change or expand on this. 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 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 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 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 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 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/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo 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 Markets or its affiliates.

Saxo Markets
3 Church Street, #30-00
Samsung Hub
Singapore 049483

All departments are available 08:30 to 17:30 Monday to Friday.

Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning 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. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

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.

This advertisement has not been reviewed by the Monetary Authority of Singapore.