Saxo Bank Q2 Outlook 2012: European politics is spinning out of control

Saxo Bank, the online trading and investment specialist, believes the economic momentum will weaken during Q2 2012. The eventual return of QE seems inevi­table as central banks try to keep the crisis at bay and the compounding of policy errors failing to address the solvency problem and grow­ing social and geo-political friction will po­tentially lead to an explosive outcome.

According to the Bank’s analysts, Europe will continue on the path of flat growth this quarter but even the rebound in economic growth in the US cannot save Europe from entering a new economic low-point during next 2-3 quarters. Asia will continue to aid its growth through imports. If the recovery in the US fails to provide enough jobs momentum a return of QE some time in Q3 may be a possibility. In Asia, the critical question is China, as losses on investments continue to accumulate and eventually need to be realised.

Also, Saxo Bank predicts that commodities will face a bumpy road ahead as geo-politics have intensified the unpredictable nature of oil mar­kets. Grain prices risk ris­ing sharply and gold is expected to consolidate during the early part of Q2.  Volatility will return to the equity market in Q2 as stimu­lus is withdrawn and safer, dividend paying stocks will outperform.  The Australian dol­lar is the least favourite of the major currencies with the most to lose relative to the Chinese landing and its current valuation and the Chinese Yuan could also lose steam as China’s terms of trade shift and on reduced capital inflows.

Steen Jakobsen, Chief Economist at Saxo Bank, comments: “Nothing has changed economically but the political will and support for the financial experiment initiated by policy makers’ post-Lehman has collapsed. European politics is spinning out of control and the gap between politicians and voters is widening, that's what you see in Greece, that's what you see in France.  We have reached the second phase of the crisis: During the first phase no one could see or feel the crisis. Now comes the protest against the established. The third and final phase is 6-18 month from now and that is where we turn towards a mandate for change and reforms.

Our growth outlook for this quarter is relatively sanguine but we fear that the next 2-3 quarters will mark a new low point in economic growth, politics, and sentiment with higher deficits and more crowding out of capital. However, we remain optimistic because we believe we will quickly get to where things can’t get much worse and, hopefully, before the end of 2013, someone somewhere in Europe, maybe in Germany, will be given a ‘Thatcheresque’ mandate for real change.”