A Jeremy Corbyn-led UK government, German recession, new Federal Reserve chair and a giant solar flare are among Saxo Bank’s 10 “unlikely but underappreciated” events that have an outside chance of disrupting markets in 2019.
These predictions do not constitute Saxo’s official market forecasts for 2019 but represent a warning of a potential misallocation of risk among investors who believe there is next to no possibility of them materialising.
Steen Jakobsen, chief economist at Saxo Bank, said the underlying theme to this year’s ‘outrageous’ market predictions could be summed up as “enough is enough”.
He explained: “A world running on empty will have to wake up and start creating reforms, not because it wants to but because it has to. The signs are everywhere.
“We think 2019 will mark a profound pivot away from this mentality as we are reaching the end of the road in piling on new debt and next year will see us all beginning to pay the piper for our errant ways.”
Below, FE Trustnet considers Saxo Bank’s 10 most outrageous market predictions for 2019.
EU announces a debt jubilee
The first outrageous prediction from Saxo Bank could be a bout of debt forgiveness set against a backdrop of unsustainable public debt, higher interest rates and tapering by the European Central Bank (ECB), and sluggish growth.
In such a scenario, said head of macro analysis Christopher Dembik, weakness in Italy could begin to impact European banks and see the EU fall into recession, prompting the ECB to take action as the contagion spreads.
Germany and other core EU nations would be left with little other choice than to back monetisation of debt for debt levels over 50 per cent and guarantees for the remainder, said the analyst.
Prime minister Corbyn sends GBP/USD to parity
Next on the list is a snap UK general election victory for a Jeremy Corbyn-led Labour Party as Theresa May’s Conservatives implode over a Brexit deal.
“With a popular mandate and strong majority in Parliament, the Corbyn Labour government embarks on a mid-20th century-style socialist scorched earth campaign to even out the UK’s gross inequalities,” imagined global macro strategist Kay Van-Petersen.
While higher property taxes are introduced, measures to support a universal basic income, nationalisation of utilities widen deficits as inflation rises, business investment falls and non-domiciled foreign high net worth individuals flee, said Van-Petersen.
Performance of sterling vs US dollar over 3yrs
Source: FE Analytics
“Sterling is crushed on the double trouble of ugly twin deficits and lack of business investment on the still-unresolved Brexit issue,” said the strategist, as sterling heads towards parity with the US dollar for the first time ever.
Trump tells Powell “you’re fired”
Another outrageous prediction – although one that has become increasingly plausible more recently – is the sacking of Federal Reserve chair Jerome Powell by US president Donald Trump and promotion of a more compliant replacement.
The scenario could find its roots in a further rate hike at December’s meeting of the Federal Open Market Committee and any potential fall for the US economy and stock market in the new year.
“By the summer, with equities in a deep funk and the US yield curve having moved to outright inversion, an incensed president Trump fires Powell and appoints Minnesota Fed president Neel Kashkari in his stead,” said John Hardy, head of FX strategy.
“The ambitious Kashkari was the most consistent Fed dove and critic of tightening US monetary policy.”
Germany enters recession
A more concerning prediction from a European standpoint could be a German recession, as the economy struggles from tariffs on car exports, a lack of digitalisation and a power vacuum left by Angela Merkel.
“A global leader for decades, Germany has struggled to upgrade and leverage the latest technology across the public and private sectors,” said chief economist Jakobsen. “The crown jewel of the German economy, representing a cool 14 per cent of GDP, is its car industry.”
However, the economist said Germany is only just beginning its transformation to electric vehicles and is years behind other global peers.
Performance of German GDP
Source: OECD
“Next year will be the peak of anti-globalisation sentiment and will create a laser-like focus on costs, domestic markets and production, and the further use of big data and reduced pollution footprint – the exact opposite of the trends that have benefitted Germany since the 1980s,” he said. “As such, we see a recession arriving as early as Q3 2019.”
Apple ‘secures funding’ for Tesla at $520/share
With an increasing cash pile to deploy, Apple could decide that electric vehicles offer it the opportunity for growth beyond its iPhone business.
“It’s either the boring financial engineering of dividends or share buybacks or it’s a bold move beyond the confines of smartphones, laptops and their associated services and accessories,” said head of equity strategy Peter Garnry.
A deal that could pay for both companies is a takeover of Tesla, providing the electric car maker with much-needed capital.
“The acquisition makes perfect sense. It’s small enough to be an all-cash deal and it only represents 12 months of Apple’s free cash flow,” said Garnry.
“The two companies are both focused on engineering and design in hardware coupled with vertically integrated distribution models in high-fashion areas.”
Corporate credit crunch pushes Netflix into GE’s vortex
Growing levels of corporate debt in the US could result in another “unlikely but underappreciated” outcome, with giant conglomerate GE collapsing under the size of its huge liabilities.
Such an event would send shockwaves through global credit markets, said Garnry, with the Fed having already tightened financial conditions beyond the market’s ability to bear.
Online media services company Netflix could be caught in its wake, with more than $10bn of debt on the balance sheet and causing costs to increase.
This could spread and cause a crisis for high yield bond exchange-traded funds where market makers are unable to set meaningful spreads, forcing a withdrawal from the market and highlighting their negative impact in times of market turmoil.
IMF and World Bank announce intent to stop measuring GDP, focus instead on productivity
While governments have been focused on traditional measure of growth GDP in the post-financial crisis environment, many have neglected how they improve productivity.
Indeed, GDP has failed to capture the real impact of low-cost, technology-based services and unable to account for environmental issues.
As such, a shift by the International Monetary Fund (IMF) and World Bank to productivity would provide a better gauge for assigning change in an economy’s productive capacity over time.
“Productivity is certainly one of the most popular, and yet least understood, terms in economics,” said Saxo Bank’s Dembik. “Simply defined, it refers to output per hour worked. In the real world, however, productivity is a much more complex notion.
“In fact, it can be considered as the greatest determinant of the standard of living over time.”
Global transportation tax enacted as climate panic spreads
Another outrageous prediction for Jakobsen and Garnry would be the enactment of a global transportation tax linked to carbon emissions, which could be sparked by more extreme weather conditions.
Such a move would encourage industries such as aviation and shipping to move more quickly although it would likely have an impact on share prices as uncertainty increased and growth was impacted.
X-class solar flare creates chaos and inflicts $2trn of damage
A more unpredictable event with little forewarning could be a giant solar flare, known as a coronal mass ejection (CME), the most powerful of which are the X-class.
“Previous swarms of flares and their associated CMEs, called solar storms, have disrupted radio and satellite communications as well as ground-based power transmission infrastructure in the past,” said Hardy.
The 1859 Carrington event – an X40 flare – caused widespread disruption to the telegraph systems of the time and could have bigger impact on the technology-based culture of today.
“In the summer of 2012, the earth got lucky when it missed a giant flare by a matter of a weeks as its associated CME washed across the earth’s orbital path a week after the earth had transited,” said Hardy.
An X40 striking the western hemisphere could cost the global economy $2trn.
Australia launches ‘TARP Down Under’ after nationalising the big four banks
The final entry on Saxo Bank’s list of ‘unlikely but underappreciated events’ is a collapse in the Australian property market following years of growth that even withstood the global financial crisis.
“In a bid to stave off the crisis’ effects, Canberra’s ‘economic security package’ further fuelled the spectacular run-up in leverage, kicking the proverbial can down the road,” said market strategist Eleanor Creagh.
However, plummeting credit growth could spark the collapse – forcing banks to stop lending, destroying household wealth and consumer spending, and causing Australia’s first recession for 27 years.
Bad debt could squeeze bank profit margins as earnings fall and leave them at risk of insolvency, leading the Reserve Bank of Australia to step in with a ‘troubled asset relief programme’ (TARP), employed by the US Fed after the crisis.
“With the banks at the forefront of financial stability they are deemed ‘too big to fail’, not least because Australia’s baby boomers and superannuation investment pools rely heavily on the banks’ consistent dividend yields,” Creagh added.