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
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.