x Abu Dhabi, UAESaturday 20 January 2018

Oil to slump to $50 a barrel, Saxo Bank says in report

Gold will drop to US$1,200 an ounce and Germany's DAX, to slide 35 per cent from current levels, Saxo Bank analysts also write in their annual outrageous predictions.

Saxo Bank's annual look at potential shock events that could hit markets in the year ahead, in its so-called "outrageous predictions" report, flags a collapse in Germany's blue-chip DAX index as one such extreme occurrence.

"It is always tempting when making predictions to call for radical changes to the market landscape, but having produced this publication now for over 10 years, we hope the real value on offer to readers is to identify major events and risks that seem out of the box and "outrageous", but are actually far more probable than appreciated and could have significant (mostly very negative) consequences on investment returns in the New Year," they wrote.

Among the calls, which cover all asset classes, is the potential for crude prices to slump to US$50 a barrel, gold to drop to $1,200 an ounce and Germany's DAX to slide 35 per cent from current levels, Saxo analysts wrote.

"The DAX was one of the world's best performing stock markets in 2012 as Europe's economic juggernaut continued to fare better than most euro-zone countries. This will all change in 2013 as China's economic slowdown continues, thereby putting a halt to Germany's industrial expansion," the Saxo Bank chief economist Steen Jakobsen wrote.

China's slowdown will trigger a sharp drop in the shares of major industry players such as Siemens, BASF and Daimler, hit by stagnating revenue and declining profits, Mr Jakobsen said.

Saxo Bank's so-called outrageous predictions:

Germany's DAX plunges 33 per cent to 5,000. China's economic slowdown will continue and add pressure on Germany's industrial expansion. Such a scenario will stoke low consumer confidence and large price declines in industrial stocks, which make up a large part of the German benchmark index.

Nationalisation of major Japanese electronics companies. Japan's electronics industry will suffer after strong competition from South Korea, causing annual losses of $30 billion for Sharp, Panasonic and Sony alone. Credit worthiness will deteriorate and the Japanese government will feel obliged to nationalise key industry players - similar to the US government's bailout of the car industry.

Soybean prices rise by 50 per cent. After a year of extremely poor harvests due to bad weather, new crop soybeans will be just as exposed to new weather disruptions in the US, South America and China. Increased demand for biofuel will also push prices higher and food security will become a buzz word.

Gold price drops to $1,200 an ounce. The strong US economic recovery surprises the market and especially gold investors, which will flee the traditional safe-haven investment. Additionally, lack of pick up in physical demand from China and India will trigger a round of gold liquidation, and the metal will fall to $1,200 an ounce before central banks eventually start taking advantage of lower prices.

Crude slumps to $50 a barrel. US crude production will continue to rise through advanced production techniques and with domestic inventory levels already at 30-year highs combined with limited exports options, oil prices will come under renewed selling pressure.

The dollar/yen falls to ¥60.00. Japan's new leader Shinzo Abe has vowed to use aggressive easing measures to boost the economy, which has punished the yen. Not all measures are introduced, however, and the market will become over-positioned to for yen weakness and risk appetite retrenches, prompting the dollar to drop ¥60.00, as the Japanese currency will emerge as the world's strongest currency.

Euro/Swiss francs relationship breaks peg, touches 0.9500 franc. As European Union tail risks are aggravated - maybe by the Italian election or a Greek exit of the euro zone - capital flows will surge into Switzerland once again, inspiring the Swiss National Bank and Swiss government to abandon the franc's peg to the euro rather than push reserves past 100 per cent of Switzerland's gross domestic product. As a consequence, the euro/Swiss franc will touche a new low.

Hong Kong unpegs the Hong Kong dollar from the US dollar and re-pegs to the Chinese renminbi. The renminbi's volatility increases and Hong Kong becomes a major world currency centre.

Spain steps closer to default as interest rates rise to 10 per cent. With social tensions in the country, the public sector cannot cut costs further and Spain's sovereign credit rating will be downgraded to junk. Yields will rapidly rise as an inevitable default is priced in.

The 30-year US sovereign yield doubles in 2013. The Federal Reserve's low-interest-rate policy will force investors to leave fixed income and substitute bonds with stocks. As the bond market is far larger than the equity market a 10 per cent reallocation to stocks should amplify equity fund inflows by around 30 per cent. This will leave to higher yields in the US and will mark the beginning of a decade-long outperformance by stocks over bonds.

* Agencies