Article / 04 July 2016 at 14:00 GMT

Stress Indicators: Ouch! – politics, polls and weak US jobs

Chief Economist & CIO / Saxo Bank
  • NFP will be below consensus forecast of +175,000 new jobs
  • Italy and Hungary are the biggest risks to Europe's political landscape
  • Europe will probably become friendlier towards the UK
  • Juncker's days as president of the Commission are numbered
 And the next potential flashpoint? The Italian constitutional referendum called by PM Renzi. 
Pic: iStock

By Steen Jakobsen

There has been a major rally off the lows in equity risk and fixed income has continued to go from strength to strength. No doubt a lot of the big moves higher have been due to investors chasing the momentum and trying to get back risk mandates.  Now, week two past the Brexit vote will see more openess towards the UK's predicament in accordance with German chancellor Angela Merkel’s appeal for patience (instead of fast-tracking the exit). Merkel has been angered by European Commission president Jean-Claude Juncker's desire to punish the British and will probably have him ousted by end of the year. This means the battle between Germany and Club Med is on…and it's going to be nasty..

Morgan Stanley's overview of political event risk
political risk
 Tina Fordham at Citibank has crafted a super interesting piece ("Global Economics View: Who's Next? EU Political Risks After The Brexit Vote") on how Italy and Hungary are bigger risks than Brexit. This view, which Fordham expresses very elequently indeed, is one that I share.
She notes that while Britons voting to leave the 28-nation bloc poses a problem tor the EU, it is actually the higher risk of Italy having its own referendum that poses a huge threat to the political landscape.

Citi Source: Citigroup

Overall I have moved my risk back to neutral risk parity model – 25% equity, 25% fixed income, with small overweight of commodities over cash/real estate.
This week will be about nonfarm payrolls from US, where I expect a worse than consensus number, driven by the labour market chart below.

The NFP numbers are out on Friday and the consensus expectation is +175,000, but the Fed’s own “broad index on labour market indicators” continues to new lows!

Leading Indicator – the Conference Board paints the same picture..


Lower potential growth and scaremongering are yet to have an impact on High Yield and Investment grades (..of course the Fed backing down yet again helps….)


The funding cost of government debt for world's three largest economies has fallen from 3.00% in 2011 to less than 60 bps!!!

AUD vs. JPY – my ultimate indicator on risk-on or risk-off – continues to point down despite the rally in equities and fixed income.

US real rates have dropped from -35 bps to -45 bps – peaking the upmove in May….

real rates
Considering all the negative predictions of economic fallout – the Economic Surprise index from Citigroup continues to move… .UP!

Happy Fourth of July to all my American friends,

Safe travels,

Steen Jakobsen

– Edited by Clare MacCarthy


Steen Jakobsen is chief economist and CIO at Saxo Bank

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Steen/Stress Indicators

05 July
Market Predator Market Predator
Hello Mr. Jakobsen, I would intercede for webinar dedicated to Steen/Stress Indicators, if possible. Thx. in case you will consider.


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