Saxo Bank speculates that the EU may opt for a debt jubilee, while a Corybn-led Labour government could send the pound to parity against the US dollar.
At the end of the year, investors are treated to flurry of outlook predictions for the year ahead; some more accurate than others.
For the past decade, Saxo Bank has taken a different approach, publishing a series of “outrageous” forecasts. While not Saxo’s official market forecasts for 2019, the predictions are “events and market moves deemed outliers with huge potential for upsetting consensus views,” says Steen Jakobsen, chief economist at Saxo Bank.
Below we take a look at a select few in more depth.
EU announces debt forgiveness
Going into 2019, European economies are still bedevilled by unsustainable levels of public debt. This is exacerbated by a gradual tightening of monetary policy by the European central bank and continued sluggish economic growth.
The key risk within all of this, says Christopher Dembik, head of macro analysis at Saxo, is Italy. The country, he predicts, could spark a crisis when a large amount of its debts mature in 2019. He notes: “Italy is the key bellwether as it faces a massive maturity wall set to reach around €300 billion in refinancing over 2019 as interest rates spike.”
Under this scenario, similar to the Greek crisis in 2011, contagion engulfs the continent. Debt fears spread to other European economies, weakening European banks and plunging the continent into recession. When the contagion spread to France, “policymakers understand that the EU faces the abyss,” says Dembik.
With EU leaders refusing to let the Eurozone fall apart, they opt for a radical solution. Debt levels over 50% of GDP are written off and the rest of debt is guaranteed via a Eurobond scheme. Thus, the debt is forgiven.
A debt jubilee would not be without precedent, says Dembik. He notes: “Debt forgiveness has been very common in Europe. In the interwar period, jubilees swept across Europe to the tune of 50% of GDP for France, 36% of GDP for Italy and 24% of GDP for the United Kingdom.”
Trump fires Federal Reserve chair
The Federal Reserve is supposed to be independent and unswayed by politics. The continual criticism of Fed chair Jerome Powell by president Donald Trump in 2018, then, has been something of a break with convention, stoking fears that the Fed’s prized independence is slipping.
John Hardy, head of FX strategy at Saxo Bank, imagines this culminating in Trump firing Powell in 2019.
“At the December 2018 Federal Open Market Committee meeting, Federal Reserve chair Jerome Powell signs on with a slim majority of voters in favour of a rate hike,” Hardy envisages.
With corporate credit spreads already spiking and the stock market showing signs of strain, the latest rise tips the US economy and markets over the edge in 2019.
Powell, however, refuses to respond by reversing the Fed’s rate rise programme or restart QE. He argues that clearing bad debts will have long-term economic benefit for the US. Instead, he “merely tinkers with the pace of quantitative tightening and a one-off rate cut.”
By the summer of 2019, US equities are in a slump. An incensed Trump soon fires Powell, replacing him with Minnesota Fed president Neel Kashkari, known for his dovish monetary policy views.
Kashkari happily yields to Trump’s wishes, unleashing unprecedented stimulus for the US economy. As a result, “nominal GDP growth rises at a 7% clip, with inflation running at 6% (even if reported at 3%), while Fed policy is all the way down at 1%,” says Hardy.
Corbyn sends the pound to parity with the dollar
This scenario starts with the result of Brexit still not being resolved by the 29 March deadline. As a result, a Corybn-led Labour government sweeps to power in a snap election.
“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,” predicts Kay Van-Peterson, Saxo’s global macro strategist.
“New tax revenue streams are tapped into as Corbyn brings the UK’s first steeply progressive property tax in to being to soak the wealthy and demands the Bank of England help finance a new ‘People’s quantitative easing’ or universal basic income.” At the same time, utilities and rail companies are nationalised and state spending rapidly ramped up.
The result of all this is a surge in the UK’s budget deficit to 5% of GDP, a steep rise in inflation and business investment stagnation.
“Sterling is crushed on the double trouble of ugly twin deficits and lack of business investment on the still-unresolved Brexit issue,” notes Van-Peterson, who adds that under this scenario the pound could reach parity with the dollar for the first time ever.
Full list of Saxo Bank’s 10 Outrageous Predictions for 2019:
1. EU announces a debt jubilee
2. Apple “secures funding” for Tesla at $520/share
3. Trump tells Powell “you’re fired”
4. Prime Minister Corbyn sends GBPUSD to parity
5. Corporate credit crunch pushes Netflix into GE’s vortex
6. Australian central bank launches QE on housing bust Down Under
7. Germany enters recession
8. X-Class solar flare creates chaos and inflicts $2 trillion of damage
9. Global Transportation Tax (GTT) enacted as climate panic spreads
10. IMF and World Bank announce intent to stop measuring GDP, focus instead on productivity