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Saxo Warns Reflation Trade Ends In Q2 With “Healthy Correction”

Summary:
The reflation trade that started before Donald Trump’s victory in the US presidential elections accelerated in Q1 as global economic data improved and surprised against expectations. Global equities are up 6.5% in dollar terms with markets such as Hong Kong, emerging markets, and Brazil the clear outperformers. In its Q2 2017 Outlook report, Saxo Bank ...

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The reflation trade that started before Donald Trump’s victory in the US presidential elections accelerated in Q1 as global economic data improved and surprised against expectations. Global equities are up 6.5% in dollar terms with markets such as Hong Kong, emerging markets, and Brazil the clear outperformers.

In its Q2 2017 Outlook report, Saxo Bank warns that the reflation trade will end in Q2 with a healthy correction in global equities.

 

The biggest perception-versus-reality gap remains this risk of recession. While the market at large sees less than a 10% chance of recession, we at Saxo –together with our friends at South Africa’s Nedbank – see more than a 60% chance.

No, we are not “predicting a recession”, but our economic model does indicate a significant slowdown as the large credit impulse from China and Europe in the early part of 2016 has not reversed to negative, which should make the market conservative and risk averse (and certainly long US fixed income).

Along with Q2, spring is now upon us, so we will enjoy both the season and the “fake” economic spring we see now as a slowdown is coming. In this slowdown, Europe will do better than the US, EUR will do better than USD, and Asia will be under pressure to reform its way away from debt as the main driver of growth.

This leaves us with no option but to warn that Q2 and Q3 might be very different to the Trump-mania and unrealistic valuations we see right now.

Saxo Warns Reflation Trade Ends In Q2 With

I write this from Zurich Airport before boarding for Hong Kong. I have met 30 clients over the last four weeks. All 30 are overweight equities, and all 30 believe more upside is coming.

In other words, precisely no one thinks that this momentum surge in equities based on hope, low yields, and the deductibility of interest on debt for corporates will end any time soon.

For my part, I will leave you with the sage advice of J.P. Morgan who when asked how he became rich, responded succinctly: “I TOOK MY PROFIT TOO EARLY”.

KEY RISKS FOR Q2

  • LE PEN WIN WOULD SEE BUNDS AT SUB 20BP & EURUSD DROP BY 10%
  • OIL COLLAPSE WITH WTI DROPPING TO LOW $40S/BARREL COULD REVIVE DEFLATIONARY FEARS AND KILL THE INFLATIONARY SPIRITS
  • LACK OF A QUICK PASSING OF TRUMP TAX REFORM/STIMULUS PLAN IN THE US (PARTICULARLY IN THE SENATE) COULD SEE THE MARKET QUESTION THE TIMING.

Saxo Full Outlook below...

Saxo Warns Reflation Trade Ends In Q2 With
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Tyler Durden
Tyler Durden is a reference to the lead character in Fight Club. It's the pseudonym for Zero Hedge's key author(s) used to hide their identities.

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