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From the Floor: No such thing as 'animal spirits' — #SaxoStrats

   • Asian session shows growing risk-off mode in equity markets
   • Data-heavy week includes FOMC meeting, nonfarm payrolls
   • Trump model relies heavily on weaker USD: Jakobsen
   • 'China will occupy the vacuum left by Trump': Jakobsen
   • US faces high risk of recession in 2017
   • The 'animal spirits' claim is not supported by data: Jakobsen
   • Hedge funds' commodity exposure highest since 2014
   • Oil struggling as WTI net-long position hits record levels

By Michael McKenna

The first weeks of Donald Trump’s presidency have produced probably the most dramatic and heavily protested series of policy shifts in decades. As we type this, US airports are swarming with protesters opposed to the president’s new travel bans, and a deadly shooting at a Quebec City mosque has pundits of all stripes lining up to either blame or endorse the climate created by Trump’s far-reaching populist efforts.

“The president is employing a neo-Nixonian ‘shock doctrine’" says Saxo Bank chief economist Steen Jakobsen, adding that he sees a multitude of risks for the US economy as it heads further into barely charted territory.

“First of all,” says Jakobsen, “Trump’s policies are de facto centred on a weaker USD... geopolitically speaking, we see German chancellor Angela Merkel moving into a position of leadership within the G7 while China looks likely to occupy the vaccum left by Trump’s isolationist programme”.

“There are two ways that Trump might encourage a weak dollar,” claims Jakobsen; “he could do it indirectly via a focus on yuan and MXN strength, or directly by making a statement on how the greenback has to head lower.”

In Jakobsen’s view, the result of all of this is a 60% likelihood of US recession in 2017. This, explains Saxo’s chief economist, relates to the cost of capital and the inability of the lending system to support […] we see a flat-to-negative overall G5 balance sheet, reversing the last six years of expansion.

Balance sheet
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Source: Federal Reserve

Concerning Trump’s plans for deregulation of the financial sector, Jakobsen says that he “wishes the president the best,” but ultimately he sees the “Trump trade” euphoria running out of steam.

“There are no data that support the ‘animal spirits’ narrative,” concludes Saxo’s chief economist.

Today's Asian trade, says Saxo Bank head of fixed income strategy Simon Fasdal, showed a shift into risk-off mode following Friday’s weak, post-GDP release Wall Street session.

Consequently, adds Fasdal, we see US Treasury yields heading lower while 10-year German bunds are trading just below 162 this morning.

In Jakobsen’s view, the Trump era will likely play host to outperformance in both gold and silver as fear and uncertainty lead asset buyers towards safe-havens- According to Saxo Bank head of commodity strategy Ole Hansen, gold has headed higher following a bounce off support near $1,183/oz with near-term resistance seen at $1,195, $1,200, and $1,205/oz.

Hedge funds, adds Hansen, currently maintain the highest exposure to commodities as a whole since May 2014 with geopolitics, this week’s Federal Open Market Committee meeting, the USD, and real yields remaining the focus among institutional investors.

In oil, Hansen reports that crude prices are struggling despite continued demand from funds as the WTI net-long position sits at record levels.

“The US oil rig count hit a 14-month high last week and efficiency gains mean that each new well produces between 200 and 400 barrels/day more than they did one year ago, according to Energy Information Administration statistics,” Hansen adds.

“In our view,” he concludes, “we see downside risk in WTI below $50.70/barrel”.

Although president Trump’s mandate was to reverse the status quo, the fast and relentless imposition of policies that sharply depart from a decades-old consensus has brought significant volatility into asset markets that must now contend with an unpredictable policy mix from the world’s largest economy.

One possible outcome from the US-centred instability, says Jakobsen, might be the resurgence of the Eurozone as a safe-haven as the world’s single largest trading bloc remains notably resistance to Trump-style policies.

“In the event of a US recession,” concludes Jakobsen, “we are long yield into [such an event], and short yield after it comes into play.”

Donald Trump
Many thought president Trump would moderate his stances once in office. 
This has not proved the case. Photo: Wikimedia Commons 

Michael McKenna is an editor at Saxo Bank 

Editor’s note: From the Floor takes advantage of's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.
influx influx
All sound lost at 4:12 in the video?
Martin O'Rourke Martin O'Rourke
Hi influx, we're looking into it. It was fine live this morning so something may have gone awry with the download.
influx influx
Thanks. Always a pleasure to listen to Steen's macro updates so much appreciated!
Martin O'Rourke Martin O'Rourke
Upload is in process and we should have it with you shortly. I'll let you know as soon as that is done.
Cat Cat
Does the Monday AsiaPac call get uploaded? I didn't dial in because of the time difference, but wanted to listen to the recording if possible.
Martin O'Rourke Martin O'Rourke
That is now fixed. We're not entirely sure what the problem was and are looking into making sure this does not happen again. Apologies all!
Cat Cat
Thanks@Market Predator.
Market Predator Market Predator
@Cat: welcome. @Martin: finally you deserve "finger button"☺


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