Expectations point to a decline in global markets as the global economy approaches collapse as a result of the final interest rates that policymakers will approve over the next quarter or so, according to a new report on the Q2 performance of global markets, released by Saxo Bank, the multi-asset trading and investment specialist.
“Global central banks realize that it’s better for them to err on the side of excess hawkishness than to continue to peddle the narrative that inflation is transitory and will remain anchored,” said Steen Jakobsen, chief investment officer at Saxo Bank.
He added, “The US dollar is incredibly strong and reduces global liquidity through the increased import prices of commodities and goods, reducing real growth. 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 $95 billion per month. This triple whammy of headwinds should mean that in Q4 we should see an increase in volatility at a minimum, and potentially strong headwinds for bond and equity markets.”
According to the report, the question facing investors is really this: If we are set for peak hawkishness in Q4, what then comes next? The answer is 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, again, 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 of GDP, whether through an increase in prices relative to lower volumes or service output or however one wants to define it. The loss needs to be paid for by an increase in productivity or lower real rates. In addition, lower real rates will need to be maintained to avoid the seizing up of our debt-saturated economies.
“This means that 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,” concluded Jakobsen.
