At Rosebank Wealth Group we keep a sceptical eye on a wide range of predictions, forecasts and scenarios published by analysts across the world. One of the more interesting is an annual list of ten outrageous predictions published by Danish bank Saxo Bank. Saxo’s purpose in creating the list is to ensure that it remains alert to unlikely possibilities, forcing it to broaden its thinking. We like this approach.
The predictions were published on December 7 2017. For the full version please click here.
- The United States Federal Reserve will lose its independence as the US Treasury takes charge
Steen Jakobsen, chief economist at Saxo Bank, writes that an analysis of the 104-year old US Federal Reserve shows that over the years it has experienced swings in its power and its ability to act independently of political structures. He predicts that in order to maintain federal spending and nominal growth, as well as to stabilise the bond market and save face into the 2018 mid-term elections, the US Treasury will take the reins as it did after World War II, enacting the same 2.5% yield cap on long bonds.
The background to this prediction is that both the Republican and Democratic parties will compete for their share of the populist vote heading into 2018’s mid-term elections. Budgetary discipline will be entirely absent as the Trump tax cuts create a massive revenue shortfall. In Jakobsen’s view, the deficit could be made worse by a US recession. The weak economy and higher interest rates/inflation might leave the Fed with no monetary policy tools, requiring the US Treasury to intervene.
- The Bank of Japan will be forced to abandon yield curve control
The Bank of Japan’s yield curve control policy is, according to Saxo’s head of foreign exchange strategy John J Hardy, a luxury predicated on interest rates remaining orderly elsewhere in the world. He says that a continued rise in global yields would eventually mean that maintaining the ten-year JGB ‘peg’ would transfer all of the pressure onto the yen.
He writes that the world enters 2018 oblivious to inflation risks. He predicts that inflation will rise as spare capacity in key skilled wage industries disappears and China preserves yuan strength while maintaining high nominal growth rates, in an effort to devalue its credit excess via inflation.
Hardy predicts that the Japanese yen will be crushed all the way to 150 versus the US dollar in an aggravated spike to absorb the pressure of higher yields.
- China will roll out the petro-renminbi
Ole Hansen, head of commodity strategy at Saxo, predicts that 2018 will be the year when the Shanghai International Energy Exchange finally launches an oil contract denominated in Chinese renminbi, a move with tremendous geopolitical and financial consequences.
He predicts that if this happens, the introduction of the petro-renminbi will see the Chinese currency appreciate more than 10% versus the dollar, taking the USD/CNY rate below 6.0 for the first time ever.
- Volatility will spike after a flash crash in the US stock market
Peter Garnry, head of equity strategy, predicts that in 2018, the US S&P 500 will suffer a flash crash of 25% (peak-to-trough) in a spectacular, one-off move. He says that quantitative easing, interest rate targeting and low/negative rates have aggravated imbalances and weakened the US financial system. Other risk factors include the following:
- The collapse of volatility across all asset classes in 2017. The historic lows of the VIX and MOVE indices were matched by record highs in stocks and property.
- He suggests that much of the 2017 increase in assets was due to blind and massive inflows into passive investment vehicles, smart beta funds, ‘risk parity’ asset allocation funds, and highly risky short volatility strategies.
- US voters will swing to the hard left in the 2018 election
The midterm United States elections will be held in November 2018. All 435 seats in the House of Representatives and 33 of the 100 seats in the Senate will be contested. In addition 39 State and territorial governorships and numerous other State and local elections will have to be run.
Saxo predicts that the Democrats will easily take back both houses, as the under-35 millennials will be American’s largest generational sector. Younger voters will vote against both Trump’s persona and the widening inequality gap aggravated by the Republicans’ cynical tax reform. A new breed of Democratic candidates will be unafraid of tapping into Sanders-style populism and will win the day.
The Democrats will pull the debate away from tax reform to spending stimulus for the benefit of the masses. Fiscal stimulus will be in, deficits ignored and the US 30-year Treasury yield will rise from the current 2.8% to beyond 5% – levels last seen in 2006/7.
- An ‘Austro-Hungarian Empire’ will threaten the EU with a takeover
The old divide between old core EU members and the more sceptical and newer members of the bloc will widen to an impassable chasm in 2018 and will shift the centre of gravity from the Franco-German axis to Visegrad-and-friends. The Visegrad Group (also known as the ‘Visegrad Four’ or just ‘V4’) includes the Czech Republic, Hungary, Poland and Slovakia – countries that have agreed to work together in areas of common interest within EU.
If this happens, Saxo predicts that the consequences for the euro will be severe. Looking for further weight to counter the Franco-German led ‘core EU’, Austria and the Visegrad Group will lobby to dominate the EU in a pro-stimulus and anti-immigration direction. They will successfully manage to gather a group of 13 EU countries, including Italy (once again led by Silvio Berlusconi) to form a blocking minority at the European Council. For the first time since 1951, Europe’s political centre of gravity might shift away from France and Germany.
Saxo suggests that if the political alliances within the EU shift as described above, it will not take long for the EU’s political institutional blockage to worry financial markets. After spiking to new highs versus the G10 and many emerging market currencies by late in 2018, the euro could rapidly weaken towards parity with the USD.
- Bitcoin will be thrown to the wolves
According to Saxo’s cryptocurrency analysts Kay Van-Petersen and Jacob Pouncey, the rise of bitcoin and other cryptocurrencies has been one of the most spectacular phenomena of financial markets in recent years.
They predict that the price of bitcoin will peak in 2018, with bitcoin above $60 000 and a market capitalisation of over $1 trillion, after the launch of the bitcoin futures contract in December 2017 led to a groundswell of involvement by investors and funds that are more comfortable trading futures than tying up funds on cryptocurrency exchanges.
They expect that during 2018 bitcoin will continue to rise, but Russia and China will jointly engineer a crash – resulting in a 2019 fall in value to its ‘production cost’ of $1 000.
- South Africa will blossom during 2018
Christopher Dembik, head of macro analysis at Saxo, writes that Africa has always had the potential to surprise, and that in 2018 South Africa will lead an unexpected renaissance that will see it and its neighbours blossom politically and economically.
South Africa will be the main winner as the rand becomes the emerging market darling and returns 30% against the US dollar, British pound and Japanese yen. This will bring the world’s strongest rates of growth in South Africa and the satellite frontier economies of the region.
- Tencent will outstrip Apple and become the world’s largest company
Saxo’s head of equity strategy Peter Garnry writes that China is opening up its capital markets and the country’s enormous size and surging living standards are attracting investors from across the globe. Given this, it’s no surprise that tech-sector leader Tencent is bumping up against some of the world’s largest companies by market capitalisation.
He predicts that Tencent shares might advance another 100% despite the company’s already-enormous size and in 2018 the firm will steal the world market cap crown from Apple at well above $1 trillion.
- It’s their time – women will smash the glass ceiling
Jakobsen writes that in 2018 the trend towards increasing female representation in the boardroom level will go super-exponential, with twice as many women rising to the level of CEO at Fortune 500 companies.
He thinks that the trigger for this was the rediscovery in 2017 of the gross harassment women deal with every day when knuckle-dragging alpha males run the show. In 2018, the chauvinist old boys’ clubs will be shaken to their core by shareholders and enlightened self-reflective purges. He predicts that a woman will occupy the top spot at more than 60 Fortune 500 companies by the end of 2018.