Saxo releases Q4 Outlook - Winter is coming

Saxo, the online trading and investment specialist, has published its Q4 2022 Quarterly Outlook for global markets, including trading ideas covering equities, FX, currencies, commodities and bonds, as well as a range of central macro themes impacting client portfolios.

Winter is coming once again for global markets. We are fast approaching a breaking point for the global economy—one that we’ll arrive at due to the “peak hawkishness” from policymakers over the next quarter or so. At Saxo, we have argued since early 2020 that inflation would be deep rooted and persistent. This view still holds, but three factors will lead to the inflationary breaking point. The question facing investor is really this: If we are set for peak hawkishness in Q4, what then comes next?


“Central banks realise that it’s better for them to err on the side of excess hawkishness than continuing to peddle the narrative that inflation is transitory and will remain anchored”, says Steen Jakobsen, Chief Investment Officer at Saxo.


Second, the US dollar is incredibly strong and reduces global liquidity through the increased import prices of commodities and goods, reducing real growth, and third, the Fed is set to finally achieve the full run-rate of its QT program, which will reduce its bloated balance sheet by up to $95bn per month. This triple whammy of headwinds means that in Q4 we should see an increase in volatility at a minimum, and potentially strong headwinds for bond and equity markets.

What comes next? The answer is possibly that the market begins to price the anticipation of recession rather than merely adjusting valuation multiples due to higher yields. That turning point to pricing an incoming recession could come in December when the energy prices peak with the above trio.

It's estimated the total share of energy in the global economy has risen from 6.5 percent to more than 13 percent. This means a net loss of 6.5 percent GDP. The loss needs to be paid for by an increase in productivity or lower real rates, and lower real rates will need to be maintained to avoid the seizing up of our debt-saturated economies.

“Meaning, there are really two ways this can play out: higher inflation persists well above the policy rate, or yields fall even faster than inflation. Which one will it be? That will be the critical question.”

The bright side: crises drive innovation

This energy crisis will accelerate the green transformation in Europe and create a potential renaissance for Africa but most significantly, it will hasten deglobalisation as the world economy splits in two, with India as the biggest question mark. For the global equity market, there is still some way to go this winter before hitting the bottom, but the brightest days are still ahead of us.


Peter Garnry, Head of Equity Strategy at Saxo, said: “In our Q1 Outlook, we wrote that the global energy sector had the best return expectation with expected returns of 10 percent per annum. Due to rising prices on energy companies this expected annualised return has now fallen to 9 percent, but is still making the oil and gas industry attractive. The global energy crisis is grabbing headlines, but the real winter ahead is the deglobalization current which has intensified. There is a picture that the world is splitting into two value systems. Globalisation was the biggest driver behind low inflation over the past 30 years and instrumental for emerging markets and their equity markets. Globalisation in reverse will cause turmoil for trade surplus countries, put upward pressure on inflation and threaten the USD as the reserve currency. The energy crisis will make Europe the world leader in energy technology, but in the meantime, the continent’s drive to become resource independent of Russia means that Africa must fill the gap, putting Europe in direct longer-term competition with China. In the middle of all of this is India: can the world’s most populous country strike a truly neutral position or will the country be forced to make tough choices? The estimated 6.5 percentage point rise in primary energy costs is a tax on economic growth, meaning less disposable income and less operating profits. Consumer discretionary stocks have reacted to this pressure by underperforming relative to the global equity market. The most vulnerable part of the sector is the European consumer discretionary sector dominated by French luxury and German carmakers. Countries such as Germany, China, and South Korea are the most vulnerable to a significant slowdown in consumption and their equity markets have reflected these challenges this year. Our main thesis all along has been that the global equity market is facing a potential 33 percent maximum drawdown before equities reach the trough, but rest assured, spring always returns and the brightest days in global equities are still ahead of us.”


A difficult and volatile quarter awaits

Multiple uncertainties will continue to create a volatile environment for most commodities ahead of the year end. The sector is unlikely to suffer a major setback before picking up speed again during 2023. This forecast for stable to potentially even higher prices will be driven by pockets of strength in key commodities across all three sectors of energy, metals and agriculture. With that in mind, we see the Bloomberg Commodity Index, holding onto its +20 percent YTD gain for the remainder of 2022.


“While we are seeing concerns about growth and demand, the supply of several major commodities remain equally challenged. During Q3, the sector has reasserted itself and while pockets of demand weakness will be visible, we see the supply side equally challenged—developments that support the long-lasting cycle of rising commodity prices that we first wrote about at the start of 2021”, says Ole Hansen, Head of Commodity Strategy at Saxo.


With global demand for food being relatively constant, the supply side will continue to dictate the overall direction of prices. With global stocks of key food items from wheat and rice to soybeans and corn already under pressure from weather and export restrictions, the risk of further spikes remains a clear and critical danger.

Precious metal traders and investors will continue to focus on the direction of the dollar and US bond yields. Gold is currently stuck in a wide range, but with the risk of a US recession in 2023 and inflation staying higher for longer, we see gold performing well in such a scenario. These developments will start to add tailwind to precious metal investments in 2023. We favour silver given the current weak investor participation and the additional support from a recovering industrial metal sector where supply, especially for aluminium and zinc, remains challenged by punitively high gas and power prices. The copper-intensive electrification of the world will continue to gather momentum and we are already seeing producers like Chile, the world’s biggest supplier, struggling to meet production targets.

“We view the current weakness in oil fundamentals as temporary and during the final quarter prices are likely to remain challenged at times resulting in a potential lower range in Brent crude between $80 and $100 dollar-per-barrel. Oil majors swamped with cash, and investors in general, showing little appetite for investing in new discoveries suggest that the cost of energy is likely to remain elevated for years to come.”

FX: A Fed thaw needed to deliver a sustained USD turn lower

Barring a sudden resumption of Russian natural gas flows in Q4, an economic winter is coming for Europe and the euro, as well as satellite currencies sterling and the Swedish krona. Despite the ECB and other central banks, with notable exception of the Bank of Japan (BoJ), playing some catchup in delivering policy tightening in Q3, the Fed remains the central bank that “rules them all”. We will need to see the Fed easing again before we can be sure that the US dollar is finally set to roll over.


John Hardy, Head of FX Strategy at Saxo, said: “The Fed probably can see now that that it is easier to back down from accidents created by excessively tight policy than to risk aggravating inflation risks with easing financial conditions in the middle of a tightening cycle. The US mid-term election are an important tail-risk event for USD in Q4. The US is only able to make policy at the margin on the fiscal side when one party does not control both houses of Congress and the Presidency. If the Democrats surprise and maintain control of the House, it could completely flip the script on fiscal policy. Sterling may see an aggravated further drop this winter as long as energy prices remain divergently high for Europe. In CPI-adjusted real-effective-exchange-rate terms, it is only mid-range since the 2016 Brexit referendum collapse. In Q3, the CNYJPY exchange rate reached new multi-decade highs well north of 20.00. Could Q4 finally be when something “breaks” here? China might decide that it is simply no longer in its interest to maintain a strong currency, especially if commodity prices begin to fret at the economic outlook souring. But more likely, the capitulation could come from the Bank of Japan via a stronger JPY". 


Will Q4 finally be the quarter that sees the Kuroda BoJ surrender and shift its guidance? There is tremendous two-way volatility potential for JPY crosses, particularly if the USDJPY rips to new aggressive multi-decade highs.

To access Saxo’s full Q4 2022 Outlook, with more in-depth pieces from our analysts and strategists, please go to: