H2 final sales in Western economies to be 'weak'
Dubai, October 6, 2010
Saxo Bank expects final sales in Western economies to remain weak in the second half of 2010 and into 2011 and the unemployment rate to continue to hover just below 10 per cent in the fourth quarter.
In its economic outlook for the fourth quarter of 2010, the trading and investment specialist recognises growing optimism in recent months due to a strong earnings season but the state of the US economy still overshadows these results.
'With the S&P 500 currently trading around the same level as it did at the beginning of the year, and with the lack of investments due to a weak housing market, the ongoing trouble in Southern Europe, and most developed economies, Saxo Bank fears that a cold front will stall, bringing more challenges and adversity going into 2011,' stated David Karsbøl, Saxo Bank's chief economist.
Equities rely on the notion that the impressive earnings growth rates, recorded in earlier quarters, can be sustained. According to the bank, the trouble is that earnings growth currently comes almost exclusively from one source: margin expansion, and while productivity gains can only take income to a certain level, sales growth must soon step up to the challenge.
The bank predicts that spending at state and local levels remains a downward trend as policymakers scramble to balance their budgets. Despite the fact that the recession is generally perceived to have ended in the summer of 2009, it is still very much a reality at state and local levels.
'Double dip fears re-emerged over the summer as the deceleration in the US economy progressed as predicted in our 2010 Yearly Outlook. We expect growth to come to a complete halt in the fourth quarter of 2010 as consumption deleverages, the manufacturing sector will slow down, and investments will be negatively affected by the weak housing market. Unfortunately, the risk of a double dip, within the next few quarters, is substantial in our view' Karsbøl added.
The Quarterly Outlook Q4 2010 focuses on the following areas:
General market comment
Improved corporate earnings yielded some optimism in the third quarter. However, this will not help the consumers struggling with debt, the governments crippled by deficits and the disinflation rages. The reality of economic challenges is becoming visible, but there is still a long way to go, and while some economies are beginning to recover others seem to struggle more now than before.
Saxo Bank expects risk to range trade and its view of the economy dictates a more bearish stance than its range trade call, especially with a looming slowdown in China and continued sovereign default concerns. The analysts are also concerned about the Euro zone. Like the US and Japan, Europe faces a weak private economy, but unlike the former two, cutbacks in the public sector are also on the horizon. Reining in the deficits is a necessary, healthy process, but its short-term impact on GDP growth will be considerable.
In the major currencies, the decoupling theme shows itself in a very weak US Dollar, Euro, and British pound. At the same time, currencies, most leveraged to emerging economies through export markets like the Australian Dollar, New Zealand Dollar and perhaps even the Swedish Krona, have performed very well for much of the year.
The analysts believe the equity markets are de facto pricing in too rosy a picture of the global economy. Sales are expected to be weak in 2011, trailing the development in nominal GDP, but the corporate sector might still be able to cut some costs. As such, earnings growth is expected to remain flat to marginally positive in 2011 instead of outright negative. Saxo Bank expects a normal earnings growth development from 2012.
Adverse weather conditions across the globe and the subsequent impact on food prices will continue to draw attention in the fourth quarter. This, combined with the lasting worries about double dip recession, will lead to major discrepancies in performance between the various commodity sectors. The current economic outlook continues to attract buyers to gold, silver and the PGMs with investors having been rewarded handsomely during the third quarter.
The central banks of the US, Euro zone and Japan are expected to keep policy rates on hold until 2Q2011, the bank said.-TradeArabia News Service