Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 31 October 2013 at 14:05 GMT

Macro Alert: Europe heads towards disinflation

Chief Economist & CIO / Saxo Bank

During the past few weeks every policymaker in the world has proclaimed stability and improvement. Now, one day of data ruins this illusion. Eurozone CPI 'collapsed' in October from 1.0 percent to 0.7 percent (versus 1.1 percent expected!). Europe now has less inflation than Japan (see chart below).

There's no doubt disinflation is becoming the main theme. As such, it is important to remember that from a policymaker's perspective disinflation is the worst of all evils in economics.

The key theme for a while has been that US 10-year nominal rates and the US yield curve overall dictates all markets. Since early September I have advocated being into long maturity US, German and Danish bonds and my approach is now supported by a disinflation theme which could 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 monetary stimulus from global central banks and the consequent repricing of yield curves and nominal rates relative to poorer data, especially concerning inflation but also housing and employment.

Eurozone inflation

 Source: Thomson Reuters 

global inflation

Source: Thomson Reuters

Purchasing divide increases

Furthermore, Eurozone unemployment has 'dis-improved' to 12.2 percent in September, a record high. If this is a recovery, then I do not want to see a crisis! The non-savers are losing purchasing power, while the savers are gaining purchasing power, creating even bigger divide and more inequality.

Debt is now an even bigger burden on growth and the overall economic outlook and debt projections are likely to shoot much higher, thereby upsetting present budget goals and projections being made by government officials. Corporations' balance sheets will no longer expand as making new investments and buying new machinery will be cheaper if they wait.

Japanisation in Europe and downward indicators

Europe basically asked for it (disinflation) and is now getting it: Japanisation. With no real reforms, Europe has experienced a lost decade where extend and pretend and hope were the main drivers. Now time is running out for this 'non-action' policy. This increases the odds on our main call for Europe next year: zero growth in Germany and new lows in global interest rates. We have maintained this call from August and continue to remain confident about it.

2014 is the low point

The economic impulses have a different sinus curve around a mean. What’s so significant about our forward-looking work is that most of our indicators point downwards 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 point down and hence create downward movement, but the good news is that 2014 is the low in our projected cycle. In the fourth quarter of 2014 or the first quarter of 2015 we will see a low and thereafter a true and quick recovery with inflation right behind it. Of course our projections this early on are uncertain but the trend is clear.

Into 2014 and 2015 it’s about:

  • final deleveraging
  • rediscovery of monetary pricing, and
  • a forced or non-forced exit from quantitative easing.

Futility of QE

A lot of analysis now indicates the futility of QE and the Federal Reserve can’t ignore this. What makes the point even more actual is the fact that all research papers point to QE having increased inequality, rather than having reduced it. This is a growing theme in this policy cycle, where even German Chancellor Angela Merkel is trying to construct European Union policy where she, at least by word, acknowledges the need for more social balance on macro policies.

Below is my trading strategy in light of the above and attached is what I call my 5+ (five) themes which are important to watch.

Trading strategy

For some time Saxo Bank has been calling for 1770/1800 in the S&P500, 8000+ in the DAX, 78-79 in DXY (US dollar index), higher gold and 2.25 percent in the US 10-year Treasury yield. During the last few days we have seen a slightly more hawkish Fed (ignoring data but indicating December is still a possibility for the commencement of tapering of Fed asset purchases). Our targets have been reached in both the DAX and S&P and now the disinflation threat has changed my Alpha from being 100 percent long equities to being 50 percent short equities.

My fixed income strategy remains in place with a long-term goal of new lows in global rates in 2014. Fixed income is under-owned. Even now and after consolidation we will reach 2.10-2.25 percent in the 10-year Treasury this year.

EURUSD is clearly suffering from air sickness now at 1.4000. This equates to Europe being in recession, but ironically it will be disinflation which drives the European Central Bank to cut rates so they become negative.

My Alpha:

Short S&P from 1758.00 stop @ 1815.00 in Dec Futures
Long IEF, Bunds, Danish 1.5 percent 2035, 10-year futures
Neutral on all FX – but looking to sell GBP.USD and AUD.USD
Long small EMG

My Beta:

80 percent long fixed income
20 percent cash


—Edited by Yvette Roper

Download document

Saxo Bank Q4 2013 outlook highlights.pdf

alpha yankee alpha yankee
perfect as a Cattier Armand de Brignac, congratulations, very good report indeed.
Jim Earls Jim Earls
".....despite all the hot money flows and self-congratulatory extrapolation, European macro data is collapsing (as opposed to supporting ideas of recovery). In fact, it is falling at the fastest pace in over a year as the prospect of the euro area falling into deflation may be increasing; as Bloomberg's Niraj Shah notes the single currency rises, growth loses momentum, money-supply expansion slows and bank lending stagnates. As Shah fears, that may push the region into a debt spiral as the real value of debt increases, marking a new phase in the crisis."
alpha yankee alpha yankee
Thanks Jim good point.
This comment has been redacted


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail