MACRO ALERT: Europe towards disinflation...MAJOR turn on economic data....

 

Summary:

 

Strategy: The key theme has been that US 10 YR nominal rates and US Yield curve dictates ALL markets….. I have been very long duration in US, Germany and Denmark since early September – this is now being supported by dis-inflation trend which can ruin the "Year-end rally" party in equities.

 

The simplest way to define the present market is: It's a race between the perceived further stimulus from global central banks and the consequent re-pricing of yield curves and nominal rates relative to poorer data especially on inflation but also housing and employment.

 

Trades:

 

We have been calling for 1770/1800 in S&P, 8000+ in DAX, 78-79 in DXY (US dollar index), higher gold and 2.25% in 10 Y  Yield. The last few days: A slightly more hawkish Fed (ignoring data but indicating December still possible for tapering), the target reached in both DAX and S&P plus now disinflation threat have changed my Alpha from 100% long equities to now short 50%- The fixed income remains in place with a long term goal of new lows in global rates in 2014.  Fixed income is under-owned even now and we will after consolidation reach 2.10/2.25 this year before pause. EUR/USD clearly now suffering from air sickness – 1.4000 = Europe in recession, but ironically it will be dis-inflation which drives ECB to cut rates into negative rates.

 

Alpha:

 

Short S&P from 1758.00 stop @ 1815.00 in Dec Futures

Long IEF, Bunds, Danish 1.5% 2035, 10 Y futures

Neutral on all FX – but looking to sell GBP.USD & AUD.USD

Long small EMG

 

Beta:

 

80% long Fixed income

20% cash

 

Macro comment on inflation

 

This is becoming theme and drivers over recent days:

 

Eurozone CPI "collapse" from 1.0% to 0.7% (vs. 1.1% expected!!!!!!!!) 

Europe now have LESS inflation than Japan (See chart)

 

 

 

Unemployment "dis-improved" to 12.2% - If this is a recovery….. I do not want to see a crisis!

 

Over last few weeks every policy maker in the world have proclaimed stability and improvement – now one day of data ruins the illusion. Do not forget disinflation is worst of all evils in economics from policy makers perspective:

 

The non-savers lose purchasing power, the savers gain. Creating even bigger divide and more inequality.

Debt is now an even bigger tax on growth and outlook – and debt projection will shoot much higher upsetting present budget goals and projections being performed among government officials..

Balance sheets of corporates will no longer expand as taking on new investments and machinery is cheaper done by….waiting…..

 

Europe basically asked for it (disinflation) and is now getting: Japanisation. No reforms and a lost decade where extend-and-pretend and hope was main driver but now the non-action policy is running out of time – It also increases odds on our main call for Europe next year: ZERO GROWTH in Germany and new lows in global interest rates. We had this call for a long time (Since August) and remain confident in it.

 

The economic impulses have different Sinus curve around a mean, what's so significant in our forward looking work is that most of our indicators TURNS DOWN in 2014 – hence our call for lower interest rates, lower employment, lower inflation, lower valuations and lower housing. 2014 is a year where all macro impulses turns down and hence create downward movement , but… the good news is 2014 is the low in our projected cycle – Q4-2014 / Q1-2015 will see low and quick true recovery with inflation right behind it. Of course this early on our projections is uncertain but the trend is clear: Into 2014 and 2015 it's about final deleveraging, about rediscovery of monetary pricing and an exit forced or non-forced from QE.

 

Too many paper is now indicating the futility of QE and Fed can't ignore it, what makes the point even more actual is the fact that all papers point to that QE have INCREASED INEQUALITY not improved it, which is a growing theme in policy cycle, where even Merkel is trying to construct EU policy where she at least in name acknowledge the need for more social balance on macro policies.

 

Below is what I call my 5+ - Five themes which is important to watch, the below is screen dump from presentation this morning (ahead of shock data)

 

 

 

 

 

 

 

 

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Research: http://www.tradingfloor.com/traders/steen-jakobsen

Please visit our website at www.saxobank.com

 

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