Saxo Bank, the leading Fintech specialist focused on multi-asset trading and investment, has today published its Quarterly Outlook for global markets and key trading ideas for Q3 2018 with focus on waning global growth, falling credit impulses globally, and massive complacency on the risks of a trade war as we enter one of the most dangerous periods for the global economy since the Berlin Wall fell in 1989.
Talk of ‘trade wars’ is widespread and Saxo points to the short-sightedness of the world’s governments as escalating trade tensions ahead of the November 6 US mid-term elections, where President Trump must prove he is getting the US ’a better deal’, are potentially leading to a more severe crisis.
Saxo’s Q3 Outlook covers the bank’s main asset classes: FX, equities, currencies, commodities, and bonds, as well as a range of central macro themes.
Commenting on this quarter’s outlook, Steen Jakobsen, Chief Economist and CIO, Saxo Bank, said:
“There are no winners in a trade war, and the trend is pointing in the wrong direction as nationalist agendas erode the status of global institutional frameworks. History teaches us that this can end badly. If the loser is a big economy or a strong political power, they may impose restrictions – tariffs, for example – to counter the competitive disadvantage.”
“What makes trade issues more challenging today is that currencies no longer follow the paths that current account dynamics imply they should. A country running a current account surplus is supposed to see a strong/higher currency, but in today’s world, the big current account surplus economies all seek to avoid currency strength versus the global dollar standard to maintain competitiveness and avoid the risk of deflation.”
“It’s not just about Trump, either – it also has a lot to do with China’s move to raise its global profile along every axis. China’s chief approach to this vision is so far a mercantile one via its commitment to the One Belt, One Road plan. Beijing may have already given up on the US as a long-term export market – the longer it keeps its market share, the better. The US, of course, is now actively breaking down the very international organisations that have supported growth and globalisation since the end of World War II and after the fall of the Berlin Wall.”
“Consensus still holds that an outright trade war will be avoided, but this ignores the mid-term election in the US.”
Equities – Technology is a unique sector
While global equities have experienced trouble this year, the technology sector continues to print solid returns for investors, thereby enhancing its attractiveness even more. An interesting feature of technology companies is their low debt leverage (net debt is minus 0 .62 for the MSCI World Information Technology index), which makes the sector the least sensitive to changes in monetary policy.
Peter Garnry, Head of Equity Strategy, said:
“The technology sector has the highest return on invested capital and uses less capital expenditure compared to others. The combination of these factors has pushed the valuation premium over global equities to 27%, which is a fair aggregate premium to pay for the only sector that delivers on growth every earnings season.
“Information technology is by far the most dominant sector in the US equity market but globally the sector is still second to financials with a market cap weight of 15.8%. Measured as industry groups, the group Software & Services is very close to overtaking Banks (9.9%) as the most important industry group in the world. The technology sector has changed from being dominated by hardware to being dominated by software which has much more attractive features for shareholders. We recommend investors stay overweight software.
“The biggest risks to the technology sector are regulation and global semiconductor disruption from an escalating trade war. At this point, the probabilities for both scenarios having major impacts on the technology sector in the short term are low.”
FX – A US dollar-negative trade war
The Trump administration’s aggressive stance on trade could prove a significant USD-negative as trade disruptions will also reduce the recycling of reserves into the greenback as US trade partners look to avoid adding to US dollar reserves or seek to avoid the currency entirely. The latter is particularly the case for China, which clearly has a long-term strategy aimed at raising the profile of its currency in its trade relationships.
John Hardy, Head of FX Strategy, said:
“As China’s energy import volumes mount steeply, the launch of the yuan-denominated oil contract in Q1 is arguably a gambit to eventually supplant the petrodollar with a petroyuan. As well, let’s recall that Trump’s picking of trade fights has been as frequent with traditional geopolitical allies like those within NAFTA and the EU as it has with those further afield.
“Trump focusing on Bank of Japan or European Central Bank policies and their implicit aim to keep the JPY and EUR weak could suddenly turn the tide in USDJPY and EURUSD. Admittedly, the flip-side risk is actually one of CNY weakness and USD strength versus Asian EM currencies if China chooses to abandon its strong yuan policy.”
Macro – Only China can save us
So far, China has only responded to the US measures by using the same tools, and without seeking escalation. If China really wanted a full-blown trade war, the most efficient method would be to send sanitary inspectors to local companies key to the US production chain and shut them down for a few weeks or months. The impact would certainly be much more devastating for US companies than any rise in tariffs decided by Beijing.
Christopher Dembik, Head of Macroeconomic Analysis, said:
“China seems inclined to play the appeasement card and be ready to support the global economy. On the back of weaker economic data and higher trade tensions, China has decided to ease its monetary policy for the third time this year. The country is doing what is has always done in instances of economic slowdown: it is stepping in to strengthen the economy and push credit impulse back into positive territory. China credit impulse is still in contraction, evolving at minus 1.9% of GDP, but it is slowly rising from its lowest point since 2010 and might be back above zero sooner than we think if the Chinese authorities consider that it is time to further support the economy against the trade war.
“China has still many options to counter the impact of trade tensions. It can resort either to more accommodative monetary policy through the RRR or scope for fiscal stimulus. Rising credit impulse should offset at least part of the effect of US tariffs on Chinese imports and is also expected to provide support to declining economic sectors, such as Chinese real estate, from 2019. It is complicated at this stage to second-guess the evolution of US trade policy but it is almost certain that China will do its best to avoid a full-blown trade war and related volatility because financial and monetary stability are crucial to its future economic development.”
Currency – The AUD could benefit from Chinese tariffs on US goods
Australia has a deep relationship with China. Over 36% of the country’s shipments last year went to China, accounting for 8% of GDP. Rising tensions between the US and China are a concern for Australia as the economy is heavily reliant on exports of coal, iron ore, and education to China. But it is also a longstanding ally of the US. Chinese demand is not just for base metals – services exports to China from Australia have been rising on average 15% annually over the last decade. Additionally, tourism is on the move – last year there were 1.4 million Chinese tourists with Chinese visitors accounting for about 25% of total visitor spending. Consumer goods like wine, vitamins and other quality Australian food produce have also seen significant growth in value of exports of approximately 40% per year.
Eleanor Creagh, Market Strategist, said:
“Australia is well known for quality produce and some producers stand to gain as they could find that their products become more competitive for export to China. The agriculture sector has underperformed against almost all other asset classes for several years. We are in the midst of the second-longest economic expansion in history and the US has a growing twin deficit, household savings are low, and liquidity is contracting, which could pose problems in the long run. Given worries about the outlook for global growth and inflation potentially not meeting expectations, the sector could present an opportunity, particularly in Australia. In fact, commodities have never been so cheap relative to US stocks and commodities tend to rally later in the business cycle prior to a recession.
“Chinese tariffs on US agricultural products could provide an opening for Australian exporters to fill and for Australia to expand its economic imprint. If 25% tariffs are imposed on US suppliers to China, Australian beef exporters would offer a far more competitive price with Australia having an advantage of maritime trade routes through the APAC region.”
Commodities – Challenged commodities await outcome from developing trade war
Following a strong start to the year, the outlook for commodities has become increasingly challenged as multiple headwinds have started to emerge. In crude oil, a multi-month rally ran out of steam after the Opec+ group of oil-producing nations agreed to increase production to stabilise the price. Precious and semi-precious metals, meanwhile, were challenged by continued dollar strength and the diverging direction of central bank rates. Industrial metals wobbled on emerging signs that some of the world’s biggest growth engines, not least China, showed signs of slowing.
Ole Hansen, Head of Commodity Strategy, said:
“The second half of 2019 could see crude oil initially supported by strong demand as well as continued geopolitical risks related to supply concerns from Venezuela and Iran as the deadline for the implementation of US sanctions approaches. These concerns may, however, eventually be replaced by a shifting focus towards demand growth which could begin to slow down among emerging market economies.
“Gold’s performance turned sharply lower during June as the yellow metal struggled to find a defence against the stronger dollar and Fed chair Powell’s hawkish stance on continued normalisation of US rates. Three quarters of gains were reversed after traders grew frustrated following the yellow metal’s inability to break key resistance above $1,360/oz on multiple occasions. The deteriorating outlook during June has challenged but not destroyed our positive outlook for gold. Gold’s negative correlation to the dollar remains a key challenge in the short term, but given the short-to- medium-term dollar-negative outlook, we believe this headwind will fade over the coming quarter.
“Silver remains stuck within a narrowing trading range that has been in place for the past 18+ months. Two attempts during the past quarter to break above its 200-day moving average helped trigger two major corrections. Sentiment on that basis remains challenged into Q3, especially if the latest signs of economic slowdown begin to translate into further weakness among industrial metals. Gold, however, holds the ultimate key to silver’s direction and given our views on the yellow metal, we see silver continuing to challenge resistance before eventually moving higher.”
Bonds – With fear and volatility comes opportunity
Q3 will be a transitional period where there will be a continuous worsening of credit spreads that will ultimately lead to an inversion of the yield curve by the end of this year or the beginning of 2019. Although an inverted yield curve does not cause a recession in and of itself, Saxo believes that the combination of an increasingly hawkish Federal Reserve and an overheated economy may accelerate the path towards recession.
Althea Spinozzi, Bonds Specialist, said:
“Positioning in riskier assets will continue to be light; investors will steer away from so-called supply chain economies and sectors sensitive to tariffs such as information technology and energy so long as there is no clarity regarding the rumbling trade war. Political noise in the EU area will also be monitored closely with a particular focus on Italy as we get closer to October, when the 2019 budget will be presented.
”At the same time, a volatile environment such as the current one still offers good opportunities. The sell-off that we have seen in the previous two quarters led to a progressive widening of credit spreads, hence value can be found in US investment grade bonds and selective high yield corporates. However, it is important to keep an eye on diversification and stay short on duration as credit spreads continue to be under more stress amid uncertainties and central bank policies.”
s are the real losers during trade war altercations
Trade tariffs set by Trump have primarily been used primarily to affect China’s exports with additional products and possibly countries in the pipeline under the current administration. China is the number one trade partner globally for the United States, accounting for an average 45% of the US trade deficit since 2009 and 36% since 2001, when China joined the WTO.
Investing into a more sustainable future: changing businesses from the inside out
By Shawn Welch, Vice President and General Manager of Hi-Cone Worldwide
As industries across the world are facing unprecedented uncertainty and anticipating the economic implications of the current health crisis, business leaders have the unique opportunity to seize the chance to make lasting, positive changes and re-interpret the business challenges in a positive way – without forgetting or minimising the toll the pandemic has taken. When trying to identify a way forward, the future must be sustainable. We must take this opportunity to find a more sustainable way for businesses and manufacturers to survive.
Environmental and economic concern have only increased the gap on what consumers want – more sustainability – and how much progress businesses can make without risking their viability. However, rather than giving up on ambitious goals, maybe we need to reframe the way we look at sustainability. So far, businesses have tended to react to consumer demands, often without looking into the long-term implications and research-based due diligence one would expect. Therefore, now is the right time to be more deliberate: to continue on the path towards a truly sustainable ‘new normal’, businesses need to consider the bottom line impact more than ever before and truly invest in changing their business models to become more sustainable.
To meet the UN’s ambitious 2030 Sustainable Development Goals, businesses ultimately must thrive – working towards establishing a circular economy remains crucial. Instead of a linear ‘extract, use, dispose’ approach, materials need to be respected and re-used as many times as possible, which is only possible if products are designed for re-use, re-manufacturing, repair or restarting. After all, any and all consumption comes at a price. In manufacturing, processes draw on resources to produce items that, once they have served their purpose, become surplus to requirements. Yet, to ignore this is to take an incomplete view of sustainability: instead, materials are extracted from waste to re-enter production processes. Reuse and recycling initiatives are central to this and great strides have been made in raising awareness of this need. The full environmental cost of production and consumption includes the choice of materials themselves but also the level of carbon emissions generated, and energy consumed.
Once products and processes have redesigned for a circular approach, this initial investment will often easily be recouped, especially if we start with looking at the facts when starting this crucial process. To make the Circular Economy a focus for any business very often means changing the business model. Here, investing in research and development is vital. In the packaging industry, for example, we are seeing that customers and consumers are increasingly more focused on sustainability, and that surprising changes can unlock societal and business value. Through minimising a product’s carbon footprint or making recycling easier for consumers, lifecycle-assessment-based product redesigns or using recycled plastics instead of larger quantities of cardboard, companies are identifying these more creative options and enjoying the long-lasting benefits that come with implementing them. In any case, leadership is key. A research-driven approach gets everyone on-board and seeing management committing to these goals as part of business plans helps cement these. At a recent Reuters Responsible Business Summit virtual panel, I was part of an interesting conversation. Here, Yolanda Malone, Vice President Global R&D Snacks PKG, PepsiCo, discussed how leaders have to drive the behaviours within the organisation and the tone for the culture. She explained that her sustainable plastics vision is a world where plastics never become waste. Only through putting the mantra of “reduce, recycle, rethink and reinvent” can we bring circular products to consumer. She stressed that, if we don’t reinvent, we will fall back into old habits.
Of course, consumer behaviours play a part and the easier the solution, the more likely consumers will get behind it. End consumers are becoming increasingly conscious of packaging. So, to be truly circular, we need to take into account the entire lifecycle. Mindset change needs to continue to happen. Consumers need to be clear about what their choices are. To achieve this, we must change our businesses from the inside out, allowing for close collaboration inside and outside of our organisations. Other organisations – such as governments and recycling organisations – will need to be involved in businesses’ efforts, multiplying the impact our investments will have. We must address all aspects of sustainability and, for example, have better recycling, a focus on infrastructure and emphasis on consumer education. To recover, reuse and recycle, the R&D must be in place and dedicated to sustainability. Partnerships are important as we, as other leading global companies realise, cannot do this alone. Collaboration is key when investing in a more sustainable, more Circular, future.
Securing Information Throughout the Supply Chain – Preventing Supplier Vulnerabilities
By Adam Strange, Data Classification Specialist, HelpSystems
The financial services sector is experiencing extreme disruption coupled with rapid innovation as established institutions strive to become more agile and meet evolving customer demand. At the same time, new market entrants compete fiercely for customers. Increasing operational flexibility, through the deployment of cloud infrastructure or via digital transformation initiatives, is critical for future competitiveness but it has also driven regulatory and security challenges, particularly around working with suppliers.
That said, the benefits of a diverse, interconnected supply chain are compelling: agility, speed, and cost reduction all weigh on the positive side of the equation, prompting financial institutions to pursue close, collaborative relationships with suppliers, often numbering in the hundreds or thousands.
Weakness in the supply chain
On the negative side is the increased cyber threat when enterprises expose their networks to their supply chain. In our modern interconnected digital ecosystems, most financial organisations have many supply chain dependencies and it only takes one of these to have cybersecurity vulnerabilities to bring a business to its knees.
As a result, breaches originating in third parties are common and costly – a Ponemon Institute/IBM study found that breaches being caused by a third party was the top factor that amplified the cost of a breach, adding an average of $370,000 to the breach cost.
Concern around the supply chain was also evidenced in a recent report we have just issued, whereby we interviewed 250 CISOs and CIOs from financial institutions about the cybersecurity challenges they face and nearly half (46%) said that cybersecurity weaknesses in the supply chain had the biggest potential to cause the most damage in the next 12 months.
But sharing information with suppliers is essential for the supply chain to function. Most financial services organisations go to great lengths to secure intellectual property, personally identifiable information (PII) and other sensitive data internally, yet when this information is shared across the supply chain, does it get the same robust attention?
Further amplified by COVID-19
Financial service organisations have always been a key target for cyber attacks. Our research showed that since COVID-19 hit, the risk has elevated further, with 45% of the respondents seeing increased cybersecurity attacks during this period. Likewise, hackers are rejecting frontal assaults on well-defended walls in favour of infiltrating networks via vulnerabilities in suppliers.
But financial services organisations must maintain reputations and ensure customer trust. Firms are keen to demonstrate that they are protecting customer assets, providing an ultra-reliable service and working with trustworthy partners. So, what can they do to better protect their supplier ecosystem?
At the very least, they need to ensure basic controls are implemented around their suppliers’ IT infrastructure. For example, they must ensure suppliers maintain a secure infrastructure with a minimum of Cyber Essentials or the equivalent US CIS certification controls. Cyber Essentials defines a set of controls which, when implemented, provide organisations with basic protection from the most prevalent forms of threats, focusing on threats which require low levels of attacker skill, and which are widely available online.
Likewise, they need to ensure good information management controls are in place and this begins with accurate information/data classification. After all, how can you apply appropriate controls to your information unless you know what it is and where it is?
How ISO27001 helps organisations put in place a data classification process
The international standard on information security, ISO27001, describes the basic ingredients for data classification to ensure the data receives the appropriate level of protection in accordance with its importance to the organisation. It comprises three basic elements:
- Classification of data – in terms of legal requirements, value, criticality and sensitivity to unauthorised disclosure or modification.
- Labelling of data – an appropriate set of procedures for information labelling should be developed and implemented in accordance with the organisation’s information classification scheme.
- Handling of assets – procedures for the handling of assets developed and implemented in accordance with the organisation’s information classification scheme.
Adoption of this methodology will help financial services organisations and their supply chain take a more data-centric information security approach. However, there are essentially four key stages for implementing a data risk assurance supply chain approach and these are:
1. Approval – in organisations with complex supply chains senior management, vendor management, procurement and information security will all need to support a robust risk-based information management approach. Details of previous incidents and their impact alongside the business benefits will be essential to gain stakeholder buy in.
2. Preparation – Organisations should start with Tier 1 suppliers and initially identify the contracts with the highest business impact/risk. They should identify and record information repositories and the data that they contain together with the responsible business owners. Define a business taxonomy based on information categories of that data and include supply chain factors such as what information categories are shared.
For example, they need to understand the business impact of compromise against each of the information categories. Have any suppliers suffered security incidents? What assurance mechanisms are in place? Once all this information is collated the organisation can create a data classification policy and define a set of controls for each data category.
3. Discovery – Select each data category and identify the associated contracts. Then prioritise the data category based on the risk assessment and verify that the data security controls and arrangements for each data category and contract meet the overall requirements. Once complete, hand over the contract for inclusion in the vendor management cycle.
4. Embed process – the overall objective is to embed information risk management into the procurement lifecycle from start to finish. Therefore, whenever a new contract is created there are a number of actions required which embed data risk at each stage of the bid, tender, procurement, evaluation, implementation and termination phases of the contract.
To summarise, organisations should start by researching the information risk and security frameworks such as ISO27001 and others. They should then focus on defining their business taxonomy and data categories together with the business impact of compromise to help develop a data classification scheme. Finally, they should implement the data classification scheme and embed data risk management into the procurement lifecycle processes from start to finish. By effectively embedding data risk management and categorisation into their procurement and vendor management processes, they are preventing their suppliers’ vulnerabilities becoming their own and are more effectively securing data in the supply chain.
Deloitte: Middle East organizations need to rethink their workforce in the wake of COVID-19
Organizations in the Middle East have had to take immediate actions in reaction to the COVID-19 pandemic, such as shifting to remote and virtual work, implementing new ways of working and redirecting the workforce on critical activities. According to Deloitte’s 10th annual 2020 Middle East Human Capital Trends report, “The social enterprise at work: Paradox as a path forward,” organizations now need to think about how to sustain these actions by embedding them into their organizational culture.
“COVID-19 has created a clarifying moment for work and the workforce. Organizations that expand their focus on worker well-being, from programs adjacent to work to designing well-being into the work itself, will help their workers not only feel their best but perform at their best. Doing so will strengthen the tie between well-being and organizational outcomes, drive meaningful work, and foster a greater sense of belonging overall,” said Ghassan Turqieh, Consulting Partner, Human Capital, Deloitte Middle East.
According to the Deloitte report, many organizations in the Middle East made quick arrangements to engage with employees in the wake of the pandemic through frequent communications, multiple webinars where senior leaders addressed employee concerns, virtual employee events, manager check-ins, periodic calls and other targeted interactions with the workforce.
The report also discussed how UAE and KSA governments have reexamined work policies and practices, amended regulations and introduced COVID-19 initiatives to support companies and the workforce in the public and private sectors. Flexible and remote working, team-building and engagement activities, well-ness programs, recognition awards and modern workspaces are among the many things that are now adding to the employee experience.
Key findings from the Deloitte global report include:
- Only 17% of respondents are making significant investments in reskilling to support their AI strategy with only 12% using AI primarily to replace workers;
- 27% of respondents have clear policies and practices to manage the ethical challenges resulting from the future of work despite 85% of respondents saying the future of work raises ethical challenges;
- Three-quarters of leaders are expecting to source new skills and capabilities through reskilling, but only 45% are rewarding workers for the development of new skills; and
- Only 45% of respondents are prepared or very prepared to take advantage of the alternative workforce to access key capabilities despite gig workers being likely to comprise 43% of the U.S. workforce this year according to the Bureau of Labor Statistics.
“Worker well-being is a top priority today, and similarly to the rest of the world, companies in the Middle East are focusing their efforts to redesign work around well-being by understanding workforce well-being needs,” said Rania Abu Shukur, Director, Human Capital, Consulting, Deloitte Middle East.
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