European outlook: A United States of Europe?
Following an abundance of false starts, the European economy is likely to encounter further challenges in Q2, Saxo Bank writes in its second quarterly insight for 2014. By the end of the second quarter, the European Central Bank is likely to grow increasingly concerned about deflation and the lack of growth and signal new quantitative easing and yet another set of unconventional measures.
As well, Europe faces its biggest electoral challenge since the 1970s, as the reality gap between Europe’s voters and their EU-friendly politicians is wider than ever. At the May EU parliamentary elections, look for EU sceptic parties to form one of the largest overall blocs in the new European Parliament. If Brussels listens to voters, it could mark a decisive turning point for the failing EU experiment, even if for now, the political status quo is more likely to maintain the upper hand.
While the economic outlook appears to be improving for Spain, Portugal and Greece, this is really part of an internal transfer of problems from these ‘Club Med’ countries to France and soon Germany, which is likely to flirt with recession by the end of the year. France and Germany are also likely to suffer from reduced exports, particularly in the luxury goods sector, as Asian growth cools.
Steen Jakobsen, Chief Economist and CIO for Saxo Bank, commented:
“The EU member countries have surprised with their political solidarity over the last few years of the EU crisis, but the electorate is growing restless and EU-sceptic parties are making huge inroads that the establishment must recognise. Beside this we have the eternal problem that the EU entirely lacks an economic foundation that is sound and long term. Here in early 2014, EU complacency has never been higher, just as real political and popular entropy is about to make its presence felt.”
Global outlook: a ‘state of flux’
The ‘Fragile Five” (South Africa, Brazil, India, Indonesia, Turkey), which with the recent additions of Argentina, Russia and Chile have become the “Fragile Eight”, are now in the process of rebalancing, as the Fed tapering has forced their currencies weaker and required policy tightening that will crimp growth and right the structural imbalances that have grown in recent years. This “state of flux” is a positive development overall, but too many countries and economies are trying to do the same thing simultaneously – devalue and increase exports - so growth is likely to weaken structurally and cyclically due to prior credit excesses.
As Jakobsen points outs, “We have been so focused on saving the world, the banks and the political system that we have underinvested in people, education, infrastructure, innovation and technology.
“It will not be the European Parliamentary elections that make or break the EU, but how the policymakers and their trusted mandarins respond to the slowdown and subsequent rebalancing of the world.”
Key points on investments for 2014:
Fixed income: core government bonds will be the only asset that is up Q1 2014 versus Q1 2015 (rebalancing and lack of productivity).
Foreign exchange: EURUSD will peak at about 1.4000/1.4050and then turn down to 1.2500 (the ECB should get active on deflation over the summer). USDJPY could see 95.00 on a VAT hike and initial signs of Abenomics failing. The “Fragile Eight” will drop another 5 percent.
Commodities: will do well through Q2 as real rates will drop, but could fall again heading into H1 2015.Will take profit in Q3 2014.
Equity: The S&P 500 will peak at about 1,900-1,950, then a 30 percent correction. Equities are the only asset not yet hurt by the changing economic cycle.
Consult Saxo Bank’s full quarterly outlook for Steen Jakobsen’s article in full, alongside additional outlooks for individual asset classes: https://beta.tradingfloor.com/publications/quarterly-outlook
Kasper Elbjørn, Head of Group Public Relations
+45 3065 4300