Multi-asset investment specialist Saxo Bank has launched today Quarterly outlook for the second quarter of 2024.
As elections in key market countries dominate global conversations, Saxo’s Strategy team highlights the events and indicators that investors and traders should be watching. They also explore whether this focus on elections is distracting from the real data affecting global markets.
In his macro note, ‘It’s all about the election and maintaining the status quo’, Steen Jakobsen, Chief Investment Officer at Saxo, stresses that ‘electoral optimism and a rally in shares have so far masked the unpleasant truths behind from our economy, where debt continues to grow faster than GDP.”
Today’s wave of stock market optimism, fueled by election fever, hides a more uncomfortable truth. The economy is in a delicate state, with the accumulation of debt outstripping GDP growth. Central banks around the world are tightening the purse strings, which, when combined with high real interest rates and the mountain of existing debt, could cause problems for economic momentum.
- Fixed Income: Keep Calm, Seize the Moment!
As the global economic pace moderates and inflation rates begin to decline, central banks may ease their tight monetary policies, possibly cutting interest rates in the near term. This scenario presents a compelling reason for investors to consider extending the duration of their portfolios, although caution is advised for very long-term investments due to persistent inflation concerns. Developed market monetary policies are likely to begin to diverge, especially between the Federal Reserve and the ECB, as the Fed is likely to start slowing quantitative easing while the ECB will accelerate tightening in June by starting to divest bonds in PEPP programme. This divergence will likely increase interest rate volatility, particularly for longer-dated yields.
The fixed income landscape offers various opportunities tailored to different macroeconomic conditions. Althea Spinozzi, Head of Fixed Income Strategy at Saxo, says that “despite fiscal concerns, government bonds continue to demonstrate their value as a portfolio hedge,” highlighting the resilience of these investments amid economic fluctuations. With the bond market showing attractive valuations and yields near 15-year highs, investors have a valuable opportunity to navigate the challenges of the current economic environment.
- Equities: AI and obesity rally defies gravity
In the whirlwind of market dynamics, the fervor surrounding Artificial Intelligence (AI) and innovative obesity treatments has significantly changed the investment landscape. The valuation of companies such as Nvidia and Novo Nordisk has soared, underpinning a speculative boom reminiscent of past market bubbles. This speculative fever, alongside a complicated backdrop of economic indicators, suggests a pivotal moment for investors, encouraging a diversified and more neutral approach towards US stocks in anticipation of possible valuation adjustments.
In relation to the wave of global elections, Peter Garnry, Head of Equity Strategy at Saxo, highlights how these are influencing strategic shifts in investment preferences. He particularly notes that “this year is the biggest election year in modern history, with the US election on November 5th being the most important election and especially for Europe.” This sentiment reveals the ways in which geopolitical tension and uncertainty can affect investment strategy, particularly in relation to European defense stocks.
As the pre-election narrative unfolds, it is clear that evolving market conditions and the geopolitical landscape are creating a new paradigm for investors, directing them towards sectors and regions poised for resilience and growth.
- Merchandise: Is the fix over?
The commodity market is showing signs of recovery after the long period of consolidation followed by significant growth from 2020 to 2022. This potential recovery is boosted by the expectation of interest rate cuts by major central banks, which may soften the US dollar and reduce costs financing, thus fueling growth. While natural gas has underperformed, down 25% this year, Bloomberg’s overall Commodity Index would have risen if that sector were excluded, indicating a broader current of strength in the market. In particular, the metals sector, especially gold and silver, has already started to recover, benefiting from strong demand and the prospect of more favorable financial conditions.
Looking ahead, the outlook for commodities – particularly metals – remains positive. “We maintain our 2024 call for gold to reach USD 2,300 per ounce,” says Ole Hansen, Head of Commodity Strategy at Saxo, with gold potentially climbing as high as USD 2,500. Dubbed the “King of the Green Metals,” copper is also on a roll, thanks to steady demand and the threat of supply disruptions. Lower funding costs and economic support measures in places like China could further boost the market for select industrial metals, setting the stage for a broader recovery in commodities.
- FX: The rate cut race is shifting into high gear
In the global foreign exchange market, little change is expected as central banks – particularly the US Federal Reserve – adjust their policies in the second quarter. According to Charu Chanana, Head of FX Strategy at Saxo, “markets now expect the Fed to start cutting interest rates in June or July… This suggests that the competitive pivot story will continue to drive FX markets in the second quarter” . This environment potentially offers opportunities for FX traders, especially in high-beta and emerging market currencies, which may benefit from a weaker US dollar.
In addition, Chanana argues that the prolonged long position in sterling and clear signs of UK deflation in the second quarter could threaten sterling’s resilience and “create scope for EUR/GBP to move higher”. The Japanese yen is also in focus for potential gains on the risk of easing carry bets following a decisive shift away from negative interest rates by the Bank of Japan.
- Looking Ahead: Strategic Diversification and Risk Management
As the second quarter of 2024 unfolds, it is important to take a balanced and strategically diversified approach to investments. With a year full of important elections, it’s not just about playing the markets, but rather recognizing the narrative drive behind investor sentiment,” concludes Jakobsen. With an increased focus on fixed income and commodities and adjustments to equity exposure across geographies, Saxo’s strategy aims to address potential volatility while capitalizing on growth opportunities.