Saxo Bank’s Strategy Team is revising its forecasts for the stock market slightly lower for the next three months.

Saxo Bank observes a slowdown in fundamental data both on a global monthly and a US weekly basis. The slowdown is broad-based, which is a concern although it is not yet dramatic. Leading indicator indices confirm the slowdown, but the Strategy Team still expects a solid growth in Q2. However, this growth should weaken towards the end of the year, where stimulus programs peter out and markets will be nervous about the impact of resetting Option-ARMs, Alt-A mortgages and Commercial Real Estate refinancing.

As a result of this, Saxo Bank advises investors to show great caution in constructing their portfolios. Monetary policy will continue to reflect a weak economic outlook and the Saxo Bank analysts would be surprised to see policy rates moving higher in the current year for the US, Euro-Zone and Japan.

Commenting on the outlook, David Karsbol, Chief Economist at Saxo Bank said:

"We see that the predictions we made in our Yearly Outlook 2010 overall were correct. The improvement in financial markets as well as consumer sentiment is not real, and even though the global economy seems to be recovering, it is worth reminding oneself that much of the current growth is based on government consumption and stimulus programs. We still expect growth in the next quarter, but this is based on parameters which could – later this year – have a negative impact on investment portfolios."

The Quarterly Outlook Q2 2010 reflects on the following areas:

   1. Market comment: Bloated optimism to peak higher?

Saxo Bank is still in the deflationist/disinflationist camp on a 12 to 24 months horizon, but the low interest rates are providing support for the housing markets, which in many countries stabilised and in some countries now make new highs. 

   2. Macro forecast

For the US, Saxo Bank expects at 2.4% growth in the second quarter as inventories and stimuli pick up despite the weakness in housing. The Eurozone and UK will see weak yet positive growth in Q2 as both regions dig themselves out of the deep economic hole they are in. In Asia, Japan is struggling to escape the deflationary debt burden that continuously suppresses any real recovery. In the very short term, however, we see ample room for continued expansion as a flow of government funds is providing the fix. 

   3. FX Outlook

The poles of FX– the Australian dollar on the strong side and the British pound on the weak side – are stretched to extremes. Another question is whether the USD rally catches fire again and whether the Euro will resume its steep slide.

   4. Equity Outlook

Saxo Bank's analysts stick to the original underlying thesis that equities will move higher in the first half of the year and then lower in the second half. They have, however, revised their forecasts a bit lower as they expect macroeconomic data to remain sluggish and they do not anticipate another positively surprising earnings season leading towards further upward revisions.

   5. Policy rates

In the US, Saxo Bank expects the Fed’s first moves towards any sort of tightening to be the removal of some QE measures, but not before end-Q3. Rises in the interest rate the FED pays on reserves and/or rises in the Fed Funds rate will happen between Q2 2011 and Q2 2012. In Japan, they do not expect any increase in the BOJ’s overnight call rate (currently 0.1%), before end-Q3. It seems increasingly likely that the BOJ will bow to the pressure from the MOF. In the Eurozone, Saxo Bank expects to see the Refinance Rate to remain unchanged at 1% until at least Q1 2011 and that the ECB will provide enough liquidity to keep overnight market rates below 0.5% during this period. In the UK, Saxo Bank anticipates base rates to remain at 0.5% until at least Q1 2011, with the distinct possibility that QE is reintroduced.

   6. Commodity Outlook

Most commodities began 2010 as horses out of the starting box, racing to solid gains primarily enabled by the strong momentum that had carried over from 2009. Saxo Bank's analysts are long term bullish on gold, but think that the short term will offer better buying opportunities than the USD 1,120 seen at the time of writing of the outlook.