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Q4 This Quarter Commodities Macro Forex Bonds Asia-Pacific Equities CEE Feature Follow us:
Emerging opportunities
Late summer is usually a relatively calm period for financial markets where a low frequency of risk events gives us the space to settle back, examine our strategies and perhaps redefine
our goals. It wasnt like that this year.
First, the protracted Greek drama has the financial community wondering about the viability of the common currency and then China threw an equities curveball as its markets imploded.
Most recently, Europes migrant crisis and the policymakers ham-fisted and querulous responses raises questions about the viability of the European Union itself.
But somehow, weve struggled through. Following a snap election, Greece appears to have some hope of following the course that has been set. The Chinese authorities have taken firm
action to avert a more serious rout and in Europe, the dogged pragmatism of Germanys Angela Merkel might yet force a solution to the biggest upheaval on the continent in decades.
We still have much to contend with. The Volkswagen scandal came out of nowhere and is still unfolding. The plunge in the price of oil and other commodities meanwhile has scores of
emerging markets under severe pressure. And yet, it is this very sector that we see hope.
While the timing of a US interest rate move remains a shadow over such economies, the very volatility that engenders creates its own trading opportunities. In this publication, we put our
team of experts through their paces, asking them to give us their best trading ideas for the months that lie ahead.
We hope youll be inspired!
Kim Fournais Lars Seier Christensen

Co-founder and CEO of Saxo Bank Co-founder and CEO of Saxo Bank
TF TF
Emerging After Light

opportunities the storm ahead
Intro This Quarter Commodities
by Kim Fournais and by Steen Jakobsen by Ole S. Hansen

Lars Seier Christensen Chief economist Head of Commodity Strategy
Co-Founder and Co-CEO of Saxo Bank
Rate Dollar bulls Fear

divergence waiting factor
Macro Forex Bonds
by Mads Koefoed by John J. Hardy by Simon Fasdal

Head of Macro Strategy Head of FX Strategy Head of Fixed Income Trading
Dark Wake-up And it

horse call snowed
Asia-Pacific Equities CEE Feature
by Kay Van-Petersen by Peter Garnry by Kirill Samyshkin

Asia Macro Strategist Head of Equity Strategy Sales Trader, Client Trading Services CEE
After
the storm
This Quarter
by Steen Jakobsen
Chief economist
Emerging markets have been bat-

tered by a debt-induced perfect
storm, a dizzy US dollar and crum-
bling commodities prices. But
there is hope and investment
opportunities even though the
pretend-and-extend craziness of
printing money persists.
The seemingly endless cycle of pretend-and-extend is threatened by muddled communication Where will the excess returns come from in a world of shrinking profitability (caused by lower
from central banks, less liquidity and a dramatic increase in volatility across all asset classes. growth and inflation) and less productivity (caused by a focus on paper money returns instead
of real jobs and investments)?
And the likely policy response to all of this? More of the same, of course! It does seem, however,
that the market is growing increasingly immune to stimulus promises and more alert to the mis- The expected mathematical return year-over-year for both equities and bonds remains close to
guided fairy tale projections it has been given by central banks (and governments) through- or below zero for the next five years. The excess returns of stocks (and bonds) since the financial
out this crisis. crisis will have to be replaced by sub-par returns unless our economic model has changed fun-
damentally, which, of course, it hasnt.
The increase in volatility and the selloff in the safe asset of equities now totals more than $7
trillion lost since the peak. This could bring about a new beginning a move back towards reali- Pretend-and-extend is the very definition of insanity keep repeating the same experiment
ty as opposed to the artificial world of central bank-led credit growth. Dont forget that the weak expecting different results
growth we have had since the financial crisis erupted in 2008 is almost entirely financed by an ev-
er-increasing debt mountain. But there is a silver lining the perfect storm raging through emerging markets is also the big-
gest opportunity in decades. These markets have underperformed not only this year but also
A McKinsey Global Institute report, Debt and (not much) Deleveraging, points out that since since the commodity cycle peaked in 2011.
2007, debt has increased by a stunning $57 trillion globally, raising the ratio of global debt to
GDP by17 percentage points. Now, valuations on all metrics, top-down and bottom-up, would be a screaming buy if not for
uncertainty about the Federal Reserve, which scored an own goal in September by once again
The biggest issuers of this debt have been China and emerging markets, which together are ac- delaying the much-needed interest rate hike.
countable for more than 50% of the new debt.
All of the EM countries have issued USD debt and converted it into local currencies, but as the dollar
grew ever stronger, this practice engendered a perfect storm for emerging markets.
A predictable outcome
Its no wonder that world
Pretend-and-extend triggered a negative vicious cycle whereby EM-issued, dollar-denominated growth is falling dramatically
debt was converted into local currencies. Then, the stronger dollar increased both the debt bur-
den (as more dollars were needed to repay debt) and lowered commodity prices, a main export
for many of the EM and certainly for the old BRIC countries.
the only surprise is that
In turn, this meant less demand and less growth for EM.
policymakers seem surprised!
This happened in a world economy based on fiat money, dollar reserves, dollar-denominated
commodities and debt and a rising USD. Its no wonder that world growth is falling dramatically
the only surprise is that policymakers seem surprised!
TF Click to read more from Steen Jakobsen
Emerging markets are hugely important for the developed worlds growth and exports. In any
given year, EM account for more than 50% of world growth a fact that has global investors
desperately searching for answers.
How to play
This Q4 publication is a defensive yet optimistic view on EM as the best-performing asset not only this coming quarter but also throughout 2016. The low-grade performance in the recent past
bodes well for future returns, as its about two standard deviations cheap relative to the long-term trend. For the connoisseur, several markets are dirt cheap even on classic metrics such as price/
earnings. These include Singapore and South Korea where forward P/E is currently trading at 12.1x and 10.9x versus US and European P/E in the mid-teens.
The way to play this will always be to enter FX trades first for reasons of liquidity and access. Many EM are not deep enough to cater for robust equity markets. In addition, academic studies show that
more than 80% of all returns in EM come from FX and not from owning bonds and stocks.
Having said that, we believe EM overall are a buy equities or credit as well as forex. The fact that we are in the midst of a perfect storm should not fool us into believing the sun will never shine
again.
The Feds reluctance to hike rates will probably lead to no hikes in 2015 as the window of opportunity is closing. The market is increasingly pricing the likelihood of the next Fed policy move as like-
ly to be a rate cut as much as a hike.
This means that the long USD trade (which the market consensus loves) is about to be tested. The path of least resistance for higher growth in the world is a weaker dollar (reduces debt burden,
improves commodity prices, restarts recycling of capital from oil producers and China) and thats what we expect the world will get.The only concern is that growth will be so weak that we again
flirt with recession, not only in Europe but also in the US.
We named our Q3 Outlook: One-and-done fully expecting, naively, that the Fed would deliver its telegraphed and promised first rate hike in nine years, fully expecting it to happen under the
constraints of not having a US economy firing on all cylinders.
Now, we see one final round of global easing being implemented by the Bank of Japan, the European Central Bank and the Federal Reserve in Q4/Q1 as the business cycle bottoms. Fortunately,
the market will by that time have weakened the dollar, increased commodity prices and restarted growth from a low level. Economics and markets are finally becoming intertwined again mean-
ing fundamentals matters, and thats just about the best news ever.
Embrace the volatility of the next few months as signs that the market and economies are healing not destructing. Reality has returned and so too, will emerging markets.
The perfect storm raging through emerging markets

is also the biggest opportunity in decades
TF Click to read more from Steen Jakobsen
Light
ahead
Commodities
by Ole S. Hansen
Head of Commodity Strategy
We see a ray of hope for commodity

markets if supply can be significant-
ly reduced. But that remains a big
if, and if it fails to happen and de-
mand falters, the pain for commod-
ities could last even longer.
Commodities spent most of September stabilising after several duction wherever possible. However, producers in EM countries road to normalisation is long. The renewed weakness in the
raw materials, such as industrial metals, hit levels not seen since where currencies have been hit have to a certain extent been third quarter was driven by an expected pickup in exports
the beginning of the millennium. Rising supplies of key com- shielded from falling commodity prices. from Iran once sanctions are finally lifted in the first quarter
modities from metals to energy and crops continued to play of 2016.
havoc with those emerging market countries whose prosperity The current weakness in commodity prices differs from what
depends on exports of raw materials. was seen during the 2008-09 global financial crises when a
deep, sharp but short-lived recession triggered a collapse in de-
The extremely dovish September Federal Open Market Com-
mittee meeting highlighted worries about emerging markets.
mand which subsequently recovered fairly quickly. The current
weakness has been driven more by rising supply and collapsing
Prices tend to recov-
er much more slowly
If Federal Reserve chief Janet Yellen worries about the growth investor confidence than by a downturn in economic activity.
outlook for some of the major drivers of commodity demand,
especially China, we should as well. Hedge fund exposure cut
No quick rebound Hedge funds operating in the US commodity futures market

from a supply-driven
Although we do not expect the selloff in commodities to con-
collectively have a near-record low exposure to rising commod-
ity prices. While this lack of confidence has helped drive com- downturn than from
tinue, we are unconvinced of a rebound in prices over the commodity prices to a multi-year low, it also holds the key to the
ing months as the excess supply across the commodity spec-
trum is only slowly being reduced.
eventual recovery. a demand-induced
As we enter the final quarter of 2015, we see light at the end
China is currently being steered in a more market-oriented di-
rection. While this will yield plenty of benefits in the longer drop.
of the tunnel for commodities assuming that supply is reduced. term, it also makes the economy less manageable in the shorter
But if demand fails to keep up, the tunnel could grow even term. After more than doubling the previous year, the Chinese
longer, leaving only a glimmer of hope. stock markets 45% correction since June has raised worries
about the demand outlook for the worlds biggest consumer of
The latest spate of weakness was triggered by Chinas decision raw materials. TF Click to read more from Ole S. Hansen
on August 10 to allow the yuan to weaken. This re-ignited fear
of a currency war, and many EM currencies already under But the re-balancing of the commodity markets has begun. In
pressure from a rising dollar and the prospect of US interest energy markets, we are seeing a slowdown in US oil production,
rates eventually moving higher took another blow. while cheap fuel will help boost global growth and demand. In-
dustrial metals are finding support from producer cutbacks and Energy
Brazil and Russia are now both in recession. They can largely blame lower overhang of inventories. Bull Bear
the commodity selloff, but internal problems (corruption in Brazil) Removal of Iranian sanctions trig-
Non-Opec production, not least US
and external trouble (sanctions against Russia) weigh as well. Crude oil: The current weakness in the oil markets, which began gers a market share battle within
shale, slows faster than expected
more than a year ago and became a rout following the Novem- Opec
Oversupply woes ber Opec meeting, has yet to establish a base strong enough to Geopolitical instability increases in Global storage capacity exhausted
convince market participants that the worst is over. key producing countries from relentless inventory rise
Prices tend to recover much more slowly from a supply-driven
Demand growth gathers pace as a Chinese economic slowdown trig-
downturn than from a demand-induced drop as producers of- Global demand growth has recovered strongly in response to result of lower oil prices gers lower demand for oil
ten try to make up for the shortfall in revenue by increasing pro- lower prices, but with supply continuing to outstrip demand, the
While we remain unconvinced that a low in the market has But having seen two robust recoveries within a short peri-
#SaxoStrats been established, traders should be hesitant to get too bear-

ish, not least considering the aggressive short-covering rally
od, we sense a change of sentiment is unfolding. Key to this
would be a move above golds August high at $1,170/oz,
on TradingFloor.com witnessed in August. The road to recovery will be long, which which would confirm a floor has been established. We main-
leaves the price upside for the rest of the year capped at $53/ tain our year-end target of $1,250/oz and only a break below
barrel on WTI and $55/b on Brent crude. $1,080/oz would bring a change to this outlook.
Sugar recovery well supported
Gold: While the headlines about gold and silver have been
Sugar weakness has been prevalent for so long driven
predominantly negative all year, these metals nevertheless
by weakness in the Brazilan real, that weve almost for-
The so-called currency

remain two of the best-performing commodities on a relative
gotten to look up. But there is evidence for a prospec-
basis. During the past year, the Bloomberg precious metals in-
tive move in the sweet stuff especially if El Nino comes
dex is down by less than 10%, compared with around 50% for
out to play.
energy and 26% for industrial metals. war will continue to at-
Read more...
The so-called currency war will continue to attract emerg-
ing-market investors and central banks into dollar-based as-
tract emerging-market
#SaxoStrats
Streaming opportunities from our team of experts.
sets, not least from India and China. The Indian and Russian
central banks were strong buyers of gold in August, and this
investors...
All trades include entry, stop, target and timing.
has helped the market stabilise amid continued selling from
hedge funds and exchange-traded products.
Your Next Trade.
In a producer perspective, the currency moves are likely to
have pushed the marginal cost of production down, leaving Click to see
FOLLOW producers additional room to operate. On that basis, the even- the chart in
full size
tual recovery in gold hinges on a change in sentiment among
paper investors, such as money managers and hedge funds.
The final quarter of 2015 will be challenging, with refinery Most of the third-quarter rallies were driven by hedge funds cov-
maintenance triggering a seasonal slowdown in demand, ering short positions, first after the Chinese devaluation and sec-
while recent events in China have sparked (so far) unfounded ond after the dovish FOMC statement on September 17.
worries about a slowdown in demand from the worlds big- Precious Metals
gest importer of crude oil. The combination of a dovish Fed, uncertainty about Chinas Bull Bear
currency policy and the health of the global economy as well
US oil production is slowing, and the Energy Information Ad- as low investor involvement may eventually be what triggers Geopolitical events/worries Dollar reverts back to strength
ministration sees non-Opec output falling next year by the or forces a sentiment change. We have argued that the first
most since 1992. If realised, this will go a long way to stabilise US rate hike could become a buying opportunity as it would Robust physical demand from cen-
Universally low inflation
remove the uncertainty that has prevailed for many months. tral banks
the market during the second half of 2016 and should help oil
prices gradually recover back to and eventually above As we still wait for what potentially could be an elusive rate Rising real yields raise the oppor-
Fed hikes rates and then pauses as
hike, some uncertainty will linger. tunity cost of holding precious
levels seen earlier this year. the US economy stalls
metals
Rate
divergence
Macro
by Mads Koefoed
Head of Macro Strategy
The ultimately fruitless wait for a

Federal Reserve rate hike was per-
haps the landmark third-quarter
macro event, creating a dynamic of
policy divergence between the Fed
and the easing policies of the Euro-
zone. Emerging markets, however,
also remain a factor as the extreme
weakness seen after the late-sum-
mer withdrawal of risk appetite may
well prove overdone.
The impending rate hike from the US Federal Reserve and a third China is not the only emerging-market economy that is lacking All of this has come despite strong headwinds from the USD,
Greek bailout have continued to dominate headlines this year, love at the moment. Other prominent emerging economies are which has strengthened by close to 20% since mid-2014.
but the health and performance of emerging markets has also re- struggling, and Brazil and Russia are now in recession. They can
ceived increased attention following the third-quarter, China-driv- point accusatory fingers toward the commodity selloff, but oth- The currency drag will remain present into 2016 though the
en correction in risky assets. er internal (corruption and a lack of reforms in Brazil) and ex- effect will fade over the coming quarters as a result of USD
ternal (sanctions against Russia) factors are contributing to the Index stabilisation this year. A renewed bout of strength is
Chinese and US stock indices are both down for the year while overall weakness. certainly a possibility, however, as the FOMC starts tightening
European stocks are nearly flat (having previously been up more and if emerging markets weaken further relative to expecta-
than 20%). Stocks were not alone in taking a beating, however, While we do not expect the selloff in commodities to continue, tions.
as the outlook for emerging-market economies has also been hit we also remain unconvinced that any swift rebound in prices is
hard as the Chinese hard-landing camp continues to grow in on the cards as the size of the excess supply across the commod- The euro area, on the other hand, is struggling to turn the
size and influence ity spectrum is simply too great. In addition, serious fiscal chal- support from EUR and oil weakness into sustainable growth.
lenges loom for Brazil following the countrys Q3 loss of its invest- The short-term economic outlook looks benign, but further
We have now had below-consensus Chinese growth forecasts ment-grade status from S&P. ahead the path looks bumpier as structural reforms have been
for several years, and so the current GDP growth path is argu- put on the backburner in most countries.
ably validating our view. Nevertheless, we feel that the rapid- The recession is expected to continue into 2016 as both private
ly building pessimism about China and emerging markets in spending and investment continue to contract. India, meanwhile, Italy and France particularly continue to underwhelm in this re-
general is overdone. should continue to post high growth rates in both Q4 and into gard, which explains our continued sour outlook. Meanwhile,
next year fuelled by a rebound in sentiment following the last Spain is set to continue as the star performer in 2016 helped
No love for emerging markets years election. by a (slowly) recovering housing market, but the 2015 Spanish
election to be held no later than December 20 remains a key
Over the last two years, Chinese authorities have steered the It is worth noting, however, that we are still waiting for the large- point of uncertainty for European risk sentiment in Q4.
worlds second-largest economy in a more market-oriented di- scale reforms that were promised.
rection. In the longer term this will doubtlessly provide plenty
of benefits, but in the shorter term it is making the economy Central banks playing tug-of-war
less manageable.
The Federal Open Market Committee is not far away from its
This is the main factor behind the commotion in equity mar- much-awaited rate hike, although September has ultimately TF Click to read more from Mads Koefoed
kets and the slowdown in economic growth seen over the proved a disappointment for hawks as elevated risk sweeps across
past few quarters. global markets. There is no doubt, however, that the FOMC is get-
ting closer to the first hike in nearly a decade and the December
At present, it is doubtful whether Chinas official 7% expansion FOMC meeting remains likely though the chance of a no-hike this
target can be met this year. Credit growth has re-accelerated dur- year has increased.
ing the summer months as authorities stepped up their response
to the slowdown, and both the housing market and the services Across the Atlantic, European Central Bank president Mario
sector are growing robustly. Draghi is doing all he can to signal that the current quantitative
easing scheme may be enhanced in either scope or length.
Concern about the weak Chinese manufacturing cycle, how-
ever, is overshadowing growth in other parts of the economy. These diverging central bank policies are indicative of the present
Therefore, we may well see an uptick in growth in the final performance of the two economies. The US economy is growing
stage of 2015 and into 2016 before growth slows further in robustly, driven by the re-emergence of the all-important con-
line with our forecasts. sumer onto the economic scene, a recovering housing market. Click to see the charts in full size
Growth of GDP in % for 2014, 2015* and 2016*

#SaxoStrats
on TradingFloor.com
0.9 7.3
1.5 6.7 China on the rise again
1.5 6.2
With Chinas efforts to move from an investment-led to

End of austerity, private spending
growth, and loose monetary policy. Some fiscal and monetary easing. a consumer-led model economy hitting choppy water,
Low energy prices and low euro.
you could be forgiven for steering clear, but there is
Structural reforms still lacking in some
Concerns about credit growth will see plenty of reason to expect China to rise again.
authorities refrain from large-scale stim-
parts of the euro bloc. Geopolitical
ulus. Rebalancing towards consumption
tensions.
will hurt growth.
Read more...
Homebuilders as proxy for stronger US economy

3.0 2.4
2.5 2.6
2.2 2.8
The current trajectory of the US economy sems to be
upwards and that ought to be a boon for home con-
struction. S&P Homebuilders is one that could benefit.
Strong private sector growth. Govern- Stronger consumer, recovering hous-
ment policies remain supportive. ing market, and low energy prices.
Read more...
Housing sector slows materially. Strong Stronger US dollar.

(-er) GBP. Were showcasing just a taste of our #SaxoStrats. Link
through to more views from the team.
-0.1 2.5
#SaxoStrats
0.8 2.7
1.2
Streaming opportunities from our team of experts.
2.8
More monetary and fiscal stimulus may
be introduced to arrest the economic Lower energy prices and absence of
slowdown. austerity in advanced economies. Your Next Trade.
Geopolitical tension. Larger-than-ex-

Structural reforms still lacking. pected slowdown in China and other EM
economies. FOLLOW
Key
GDP Growth 2014 GDP Growth 2015 GDP Growth 2016 Upsides Downsides
GDP (gross domestic product) is real, inflation-adjusted, year-on-year changes in percent. 2014 is actual while 2015 and 2016 are forecasts.
Dollar bulls
waiting
Forex
by John J. Hardy
Head of FX Strategy
Septembers FOMC policy state-

ment saw the Fed recognising that
its monetary policy is global policy,
and particularly so for emerging
markets. For Q4, we look for a thaw
in some emerging market curren-
cies, taking a conservative approach
and finding value in Mexico.
The extremely dovish September Federal Open Market Com- Spotlight on emerging market currencies
mittee meeting saw chair Janet Yellens Federal Reserve ac- G-10 rundown for Q4
ceding that Fed policy is global and particularly emerging Emerging market currencies were under massive further strain Currency Q4 Outlook
market monetary policy, not just US monetary policy. in Q3 in an extension of the move lower that started almost USD bulls will have to wait though strong US data
perfectly in synch with the end of the Feds tapering process USD could suggest the Fed risks getting behind the curve, so
a mid-quarter revival in the USDs prospects is possible.
Extreme market volatility in late August and developments in in late 2014 until the lead-up to the September FOMC meet- Should only thrive if risk sentiment is weak look for
commodities and Chinese exchange rate policy distracted and ing. aggressively dovish ECB on any strong resurgence in the
EUR
alarmed the Fed sufficiently to ignore very strong US activity euro and traders may look to trade accordingly (fading
and employment data and tilt their preference to sitting on strength)
In Q3, the renewed commodities meltdown and then the
Could the Bank of Japan return to the QE trough once
their hands for just a little longer. China devaluation and global market turmoil in late August again on admission that inflation forecasts have been
JPY
provided a further pummelling of already down-and-out ex- hopelessly optimistic and low commodities ease the risks
That most likely means a move to hike rates at the mid-De- of a weaker JPY on wages?
change rates. The emerging market currencies with the worst
Defaulting to a low beta version of the USD outlook
cember FOMC meeting, by which we should have a sense of structural setups including the likes of commodity-depend- GBP more downside than upside potential in GBPUSD as the
whether the Fed is risking getting dangerously behind the ent Brazil and Russia, as well as Turkey and South Africa may quarter wears on.
curve on starting its withdrawal of accommodation or will it have become so cheap after this latest bout of selling that it The Q3 experience proved that CHF is no longer a safe ha-
sit on its hands until well into 2016. will only take a modest return of market risk willingness to see CHF ven expecting further weakness against both EUR and
eventually against the USD.
a significant bounce in their prospects in Q4, even as signifi-
The further delay to the Feds first rate hike together with the Exposure to China likely to remain a focus, so expect a rel-
cant questions remain on whether (carry-adjusted) lows are in AUD atively low ceiling for any rally attempts.
potential for more QE from the ECB could see a significant for the longer haul as these countries continue to face steep
Canada will hope that the US economic resurgence is
bounce in emerging market currency prospects during Q4 and structural challenges from USD-denominated debt. sufficiently strong to keep Canadas recession risk at bay.
delay the return of the USD bull market, though we could see CAD Looking for outperformance among the commodity dol-
a quarter in which the USD starts weak but finishes strong. But rather than focus on the higher beta/higher risk currencies lars.
More downside risks ahead as rates have pushed to new
to pick interesting emerging prospects for Q4, we would pre-
NZD lows for the cycle and the previous years of NZD strength
There is a significant risk in Q4 that we see another disorderly fer a conservative approach of finding the emerging market have only been partially unwound.
move in risk sentiment whose result would be a spike higher currencies that may have been excessively beat down by the Double top in EURSEK as SEK made a comeback from the
in the Japanese yen in particular, if not also the euro, as was latest across the board pressure and where the structural sit- SEK lows, but any further SEK strengthening will be leaned on
by the Riksbank, so no fireworks expected.
seen in the August market meltdown. uation looks healthier. As such, we will shine the spotlight on Has been excessively beaten down in places especially
the Mexican peso and Polish zloty as our choices for a come- against commodity currency peers, but comeback pro-
Any marked appreciation in the euro or the yen from here, back in Q4. NOK cess could prove slow as oil is unlikely to launch a major
however, will likely be met with new easing measures from new rally unless there is an unanticipated geopolitical
disruption.
the European Central Bank and the Bank of Japan, eventually MXN: The Mexican peso is the baby that has been thrown
helping to turn the USD back to the strong side and possibly out with the bathwater among EM currencies. As it is one of
also bringing further relief to emerging markets. the most liquid EM currencies, it is likely often traded as an EM
proxy has been excessively beaten down among its EM peers,
The wildcard for Q4 could be the pace that China allows its and is primed for #SaxoStrats.
currency to devalue after fighting pressure on the currency to
weaken with extensive reserves after its August devaluation If we see any comeback in EM in Q4, MXN will likely participate TF Click to read more from John J. Hardy
and exchange rate regime change to a managed float (with strongly. Among the positives for Mexico is the structural sit-
double emphasis so far on the managed.) uation, as the current account has not deteriorated beyond a
modest deficit despite the oil price drop. As well, 67% of
Mexican exports are into the strengthening US economy, Mexican real rates are edging into posi- First and foremost, an environment of strengthening emerging markets is likely also a positive
tive territory as inflation eases despite the weak currency of late, and the central bank may even- environment for carry trades, with the euro in the crosshairs if risk appetite makes a comeback
tually hike rates in line with the Fed to support further MXN strength. in Q4 (as we have the argument that the Fed will remain extremely cautious in withdrawing ac-
commodation, while the ECB will stay the course or even signal more easing if inflation doesnt
Poland - PLN pick up soon).
The last few years have shown us that the link between CEE currency performance and general As well, while China has mobilised significant firepower to counter a rapid weakening of the yu-
EM performance is far weaker than it used to be, as the world sees the big three among the CEE an in the wake of its steep devaluation on August 11. That and the move to a theoretical
currencies PLN, CZK and HUF to one degree or another as a convergence trade with the euro. managed float regime points to a weaker currency that should see Chinas currency mean re-
verting with its EM peers to a significant degree in coming quarters.
Polands economic fundamentals look solid heading into Q4, the country maintains a large and
unthreatened pile of reserves, and Poland offers positive real rates with a 1.50% central bank So pairing long EM trades against the euro and especially the offshore yuan (CNH) are one way
rate and slightly negative inflation. EURPLN could return back to the 4.00 level over the next to trade an emerging market resurgence, though it could be one of relatively short duration.
few months as the euro carry trade makes a comeback after a possible hiccup or two.
The one risk is a political one in Poland, as a possible new law-and-justice government after the
We will shine the spotlight

October 25 general election could force Polish banks to take a loss on remaining CHF-denomi-
nated mortgages, though this should prove a one-off, modest adjustment.
EM currencies with a twist: trading EM against what?

on the Mexican peso and Polish
Most trade flows in MXN are against the USD and most PLN trading is against the euro, so short
USDMXN and short EURPLN are certainly one way to look for MXN and PLN appreciation going zloty as our choices for
a comeback in Q4.
forward. However, there are two possible twists we can add to any long EM trades by pairing
both of these trades against the euro and the Chinese offshore yuan (CNH).
Shorting the EURUSD Homing in on long-dated EURUSD Long USD calls for #SaxoStrats
looks attractive Put ahead of FOMC greenback bulls
Were showcasing just a taste of our
EURUSD is trading lower again after Much depends on the Fed of course, but The USD may have sold off a bit on the #SaxoStrats. Link through to more views
remarks from Fed chair Janet Yellen. a three-month view offers a reasonable back of the FOMC minutes, but a closer from the team.
expectation that EURUSD will return to look suggests its weakness against the
Read more... the 1.1000 zone. EUR and CHF may be temporary.
FOLLOW
Read more... Read more...
Fear
factor
Bonds
by Simon Fasdal
Head of Fixed Income Trading
As predicted, fear infected the mar-

kets during Q3 and remains a force
to be reckoned with as we stand on
the cusp of Q4. But make no mis-
take, this is also the flux point where
opportunity begins to knock.
Clearer picture on the back of substantial quantitative easing to levels where it is

questionable if the risk premium expresses the entire risk.
Our view at the cusp of Q3 was that we could see a buildup of
excessive fear, geopolitical risk factors and less risk appetite, To view this in a measurable way, a sample of USD-denominat-
Double-digit
especially for emerging market bonds. We highlighted that
investors could exploit this excessive fear at a given point
ed emerging market bonds has a high premium per risk unit
compared to peers. This risk is there for a reason, of course. A growth rates have
combination of sluggish growth and bad politics hits not only
disappeared and
probably after the first US rate hike.
the government bonds, but a spillover to corporate bonds in
Indeed, markets have entered a mode of fear, igniting a broad such countries is also typical. In many cases this spillover is un-
based risk-off sentiment for emerging markets over the last
three months for stocks, bonds and especially currencies.
justified and investors can find opportunities when they pin-
point such discrepancies. been replaced by
There is indeed cause for concern; financial imbalances are
present, the many years of a low-yield environment has fed
the most popular acronyms for EM BRICS, MINTS or Next 11
Second, the lack of growth is playing too big a factor. The very
high growth rates we have seen in EM are unsustainable and
the anaemic growth
with substantial inbound capital flows, fuelling multi-year
growth parties in most of the these countries.
gravity defying in the long run. The whole idea with emerging
markets is their emerging into more developed economies. rates mostly seen in
When these markets eventually do evolve we will see growth
And then at some point the party is over. The ordinary re-
sumes and for EM one saying is particularly apt: The dimming
levels more aligned to developed economies. At present, sev-
eral EM countries are troubled by negative or close to nega-
the Eurozone for a
of the light makes the picture clearer. Double-digit growth
rates have disappeared and been replaced by the anaemic
tive growth (Russia and Brazil for instance), but it is not a given
that things stay this way. decade. The focus
growth rates mostly seen in the Eurozone for a decade. The
focus is back on governments, and promises versus reality. Third, the EM fear over lower commodity prices is exaggerat-
ed. Besides Russia, Venezuela, and Nigeria, which have gov-
is back on govern-
ments, and promises
Opportunity knocks ernment spending hugely dependent on a high oil price, most
EM countries are less vulnerable to oil price drops than the
Against this backdrop, it is easy to see why EM have been un- present fear expresses. These other EM countries are normally
der severe pressure, and also why the media has made such an
issue of their predicament. Indeed, this media focus has sent
more dependent on other commodity prices (for instance iron
ore in the case of Brazil) that often have a less dramatic impact
versus reality..
emerging market bond yields into high orbit, way above the on the overall economy than sudden oil price drops.
general low-yield environment.
Finally, the EM difficulties are linked to the fear of higher yields
But we have several reasons to believe that this is where we ignited by a quite aggressive series of rate hikes by the US Fed-
believe the road to opportunity begins. eral Reserve.
First of all, the overall rotation away from emerging- market As you read these lines, I think the market is slowly realising
assets has increased the yield difference between developed that the Fed would have hiked in September if there were any
reason to hike, and it did not. In our view, every Fed action TF Click to read more from Simon Fasdal
markets and emerging markets significantly. In general, we find
emerging market bonds (both government and corporates) from here will be light and shallow, and with a good chance of
trading at better risk/rewards than compared to their developed postponement way into 2016. In that case the overall emerg-
market counterparts. Especially when considering previous high- ing market risk premium related to Fed action will have to be
er-yielding segments of US and Europe, which have contracted repriced lower.
#SaxoStrats
on TradingFloor.com
UPDATE: Staying positive on Bullish on Europcar sharing programme #SaxoStrats

Banco do Brasil
We are launching a new bond trade view on the Were showcasing just a taste of our #SaxoStrats.
Political speculation and a downgrade may have new EUROPCAR bond (Europcar 2022). This is a me- Link through to more views from the team.
seen Brazilian bonds take a nasty tumble, but we dium-risk play on a positive course following the
think the longer term fundamentals remain strong. companys successful IPO earlier this year. Streaming opportunities from our team of experts.
Read more... Read more...
Your Next Trade.
FOLLOW
Dark
horse
Asia-Pacific
by Kay Van-Petersen
Asia Macro Strategist
The cheap money that came out of

the Feds quantitative easing, as well
as Chinas massive stimulus during
the financial crisis has inflated assets
heavily. Global growth is decelerat-
ing, commodities have yet to find a
floor, and EM assets have yet to catch
up with the continuing deterioration
of macro fundamentals.
While some respected peers as well as others in the market The structural EM currency devaluation, continued commodi- From Q4 into 2016, #SaxoStrats ideas
feel that the selloff in emerging markets (is overdone and we ty bear market conditions and the global slowdown are likely to
have seen the lows, I beg to differ. I think there is a lot more catch up with EM equities and bonds. At the same time, I believe Structural shorts on EM and related global slowdown
downside to come, with things set to get worse before we see developed markets will outperform emerging markets over the EEM: Main EM ETF for those not wanting to play through long
light at the end of the tunnel. next few quarters, perhaps even for a year down the line. options. One can go long EUM, which is the inverse of EEM.
EBM: One of the main EM USD-denominated bond ETFs. I ex-
So, while it may seem crazy to be still bearish at one-year lows, So a portfolio that is structurally short EM versus structural-
pect a lot more downgrades.
I feel investors and traders should be looking back to 2008 lev- ly long developed markets on the equity side resonates well
els. EM equities and bonds have lagged the clear signs of stress with me. As postulated many times before, I would expect EWM (Malaysia): The EM crisis poster child, Malaysia has:
seen in their currencies, and EM market PMIs are trending lower more easing from the European Central Bank and the Bank of 1. heavy USD debt;
with their biggest trading partner, China, needing to enter a Japan, with Fed crab walking and befuddlement only increas- 2. heavy foreign bond and equity ownership;
phase of quality yet slower growth, a natural evolution. ing the pressure on the Eurozone and Japan. 3. a position as a net exporter of commodities;
4. China as its second biggest trading partner after Singa-
Although the Federal Reserve did not hike rates, it seems not Key risks to this view are: Big stimulus from China that leads to pore, which is also in a slowdown;
only to be in search of a unicorn, but also to have taken on an sustainable commodity demand, easing from the Fed, global 5. gargantuan corruption problems and political tensions
additional mandate for global financial stability with oversight growth picking up dramatically, a big USD selloff that supports that are set to accelerate; 6) mismanaged government.
of the EMs and China, and the USD will still be the proverbial commodities and emerging markets through Q4. EWY (South Korea): Rallied the most since the August selloff.
one-eyed emperor in the kingdom of the blind, because the Korea is in a multi-year structural competitive battle with Ja-
rest of the world is easing. pan. Its biggest trading partner, China (more than 25% of ex-
ports), is now into structural yuan devaluation, and the Korean
My thesis is simple: much of the cheap money that came out
of the Feds three rounds of quantitative easing, as well as
While it may seem economy is highly sensitive to global growth.
TUR (Turkey): Turkish politics are sliding backwards and the
Chinas massive stimulus during the global financial crisis has
inflated assets heavily across the globe. Global growth is de- crazy to be still country is now alienating its US allies.
RSX (Russia): Still subject to sanctions over the crisis in Ukraine.
bearish at one-year
celerating, commodities have yet to find a floor, and EM assets
Prices of Russias oil exports look likely to stay low for longer,
(bonds and equities) have yet to catch up with the continuing
and the political and domestic environment remains dismal.
deterioration of macro fundamentals.
Although not all EMs are created equal, some will outperform
lows, I feel investors Structural longs on developed markets and further easing
Long South African equities and bonds as well as Japanese
on a relative basis: the Philippines, India and Mexico. I remain
quite bearish on Malaysia the perfect poster child for an EM and traders should equities on the back of further expected easing from their re-
spective central banks.
meltdown as well as Turkey, South Africa, Indonesia, and
Thailand to name a few. be looking back to
The best way to express views on these is through US-listed,
USD-denominated exchange-traded funds and through long
2008 levels.
put options. These enable investors to limit their downside ex-
posure, manage the volatility in their portfolios and provide a
more prudent type of leverage if things go right.
TF Click to read more from Kay Van-Petersen Click to see the charts in full size
Wake-up
call
Equities
by Peter Garnry
Head of Equity Strategy
The third quarter of 2015 will be re-

membered as the big wake-up call
as global equities spun into their
most violent period, measured by
the first and second derivative of
volatility, since the 2008 financial
crisis. Developed-market equities
are down 6.2% for the quarter but
emerging-market stocks are brutal-
ly down 16.2%.
In hindsight, it is clear that a correction was due as devel- enced a Fed rate rise from near 0%. In its latest economic pro-
oped equity markets were becoming decoupled despite many jections, the Federal Open Market Committee forecasts the
warning signals from the stunning slowdown in China, reces- long-run Fed Funds Rate to be around 3.75%, compared with
sion in Brazil, Brent crude sliding another 25% all leading 5.25% in the previous expansion before the financial crisis.
indicators pointing down across the world and to higher USD The mid-point forecast for the end of 2017 is 3%.
rates on the horizon.
The expected new normal for the Fed Funds Rate will likely
It was likely a raft of Chinese macro data that suddenly triggered drive equity valuations to levels above their historical average.
selling in developed-market equities, hauling them below certain The reason is that, while the new normal reflects lower bond
threshold values and adding just enough volatility to kick start an
unprecedented selloff across all major asset classes. The down-
yields, lower inflation and lower economic growth, relatively
will see investors demand more equities and fewer bonds in Taking valuations
ward pressure on stock prices was amplified, our research this low-yield environment.
shows, by extensive deleveraging by risk parity funds, com-
modity trading advisor and managed funds. Despite our view that US equities are a bit expensive relative
and the recent
Risk parity funds target annualised volatility of 10%. When
to stocks the world over, their earnings yield is still impressive-
ly 5.8%, against 5.3% in BAA-rated corporate bonds and 2.2% drops in equities into
consideration, we
their overweight in fixed-income assets collides with elevated in US 10-year Treasuries.
volatility across all asset classes, the only way to target 10%
volatility is to lower the leverage. Emerging markets a bargain
When that happens, chaos reigns for a while until order The global rout in equities has turned certain regions and are betting on
emerging markets to
emerges again, and risk parity funds have by now covered countries into bargain plays. German equities are now trading
around 40% of the 8.8% third-quarter drawdown. at 13.1x forward P/E. putting them at a 13% discount to UK
and French stocks. This does not reflect the earnings power of
The Federal Reserve: how much, how fast? German companies in relative or absolute terms.
outperform all
Higher USD rates are on the way for the global economy as
the US needs higher interest rates. That is clear from data
Emerging-market equities trade at 11.6x forward P/E which is
unusually low and, in our view, does not reflect long-run ex- other markets over
pected earnings growth.
the coming year.
showing US job openings at their highest since 2000, unem-
ployment down to 5.1%, signs of wage pressure in various in-
dustries, and a positive impulse to household spending from Frontier markets are also trading at large discounts to emerg-
lower energy costs. ing and developed-market equities which does not reflect
their enormous long-run potential.
The big questions for equity investors are: how much and how
fast the Federal Reserve will deliver tightening? The answers Given the current outlook for energy and mining, Canadian
to both questions will mould a certain trajectory with implica- and Australian stocks look expensive. US equities are also on
tions for equity valuation and performance. the dear side, while Japanese equities look cheap largely be-
cause of the weak yen. Taking valuations and the recent drops
Research shows that equity markets are normally less volatile in equities into consideration, we are betting on emerging
after a Fed rate hike, but then again we have never experi- markets to outperform all other markets over the coming year.
Emerging markets will recover How to play equity markets
Many analyses In classic Wall Street fashion, the plunge in emerging-market

equities and especially Chinas extreme volatility have caused
The #SaxoStrats we send out to clients are not meant only to
provide inspiration but to be part of a real portfolio approach.
conclude that the many global investors to pull out, turning almost everyone in-
to bears.
All ideas are driven by our views, but they also shape the cur-
rent portfolio composition, and all positions are added to our
previous boom in
account so we can track performance.
Many analyses conclude that the previous boom in emerging
markets was only driven by the super-cycle in commodities. All positions are set up with trailing stops and no targets. We
emerging markets So, with commodities now at their lowest levels since 1999,
the outlook for emerging markets is gloomy.
never risk more than 1% of our equity on each trade. Because
we have a trailing stop it is rare that we lose all 1%. The portfo-
lio currently has gross exposure of 221% and net exposure of
was only driven by In our view, this underestimates the strong underlying forces
in many emerging markets that are transforming themselves
62%, which we believe is an appropriate level of risk going into
Q4 as volatility is likely to stay higher than in the recent past.
the super-cycle in from pure export-driven and commodity producers into more
balanced economies with more growth coming from domestic We net short energy (Repsol) and mining (Randgold). For all
consumption as the middle class grows. other sectors we have a net exposure close to zero or posi-
commodities. The transition is already happening, and capital will flow back
tive. The portfolio is long Apple, BMW, Banco Santander, Bio-
gen, Gilead Sciences, Novo Nordisk, GoPro, MSCI China and US
into emerging markets as soon as there is clarity over the trajec- homebuilders to name a few.
tory of US rates.
The portfolio has 32 positions. It is also short 3D Systems, Alexion
Pharmaceuticals, Citigroup, E.ON, France, Genmab and Novartis.
TF Click to read more from Peter Garnry
#SaxoStrats on TradingFloor.com
Glencore gloom Insurance as a fast #SaxoStrats
is excessive growing industry
Streaming opportunities from our team
We are reversing our previous stance Sanlams share price drop is an attrac- of experts.
on Glencore as the recent decline from tive opportunity to add exposure to the
148 to just above 100 is now finally South African insurance company. Were showcasing just a taste of our
pricing in a scenario which we find very #SaxoStrats. Link through to more views
unlikely namely asset liquidation and Read more... from the team.
global recession.
Click to see the charts in full size
Read more... FOLLOW
And it
snowed
CEE Feature
by Kirill Samyshkin
Sales Trader, Client Trading Services CEE
So, the Grand Finale has been post-

poned. Despite Fed officials have
been repeatedly announcing the
end of the Belle poque of unprec-
edented cheap money in the 2nd
half of 2015, unexpectedly dovish
rhetoric after Septembers non-hike
decision offered more uncertainty
for market participants than before
the FOMC meeting.
So, the Grand Finale has been postponed. Despite Fed officials already in place, will most likely react as it did before. Rep- Earning on the constanta
have been repeatedly announcing the end of the Belle poque etition is the mother of learning says the Russian proverb.
of unprecedented cheap money in the 2nd half of 2015, unex- The combination of old examined measures - key interest Shall the hypothesis be correct, the formula above contains one
pectedly dovish rhetoric after Septembers non-hike decision rate hike and currency repos offering, will keep RUB from Variable Crude Oil prices, and one Constanta or at least lesser
offered more uncertainty for market participants than before drastic depreciation. This may not break the correlation, but Variable RUB.
the FOMC meeting. certainly decrease the Delta.
Long RUB positions against USD are subject of positive tom/
But let us focus on Russia and its economy in those rapidly Scenario 2.: Oil prices remain flat. Ruble is flat. next financing, due to the essential differential in respective in-
changing circumstances. terbank interest rates.
Scenario 3.: Oil prices go up. National currency will natural-
The credit function of national reserves ly start to revaluate, but neither the regulator, facing the Given the historic swap points above, only 2 weeks of USDRUB
budget deficit, especially in regions, nor exporters, gaining Short position would bring us 26.2 kopecks per dollar in the
The deficit in the foreign borrowing and deadlines for corporates from cheaper internal expenses, would be interested in Ru- swaps, which is circa 9,5% per annum, not taking into effect the
foreign debts pushed Central Bank of Russia into offering wides- ble gaining the strength. CBR will most likely use the oppor- compounding. To arbitrage the income from such financing, we
cale weekly to yearly foreign currency repos. Thereby, domestic tunity to refill its foreign currency reserves, buying dollars would require a hedge with the negative exposure to oil.
borrowing circuit has been locked up on national reserves. and euros from the open market. The correlation again may
not be broken, but Delta will be lowered. According to my calculations, the existing USDRUB to Crude Oil
The national currency offered at high rates and foreign curren- delta during the year from Q4.14 to Q4.15 was roughly equal to
cies offered via repos at low rates created a circle, in which arti- 0.7 in average. Concerning we expect delta to decrease from the
ficial demand for rubles from banks and exporters kept RUB ex-
In substance,
Regulators actions, we may assume taking 0.5 notional amount
change rate from further devaluation. At the mean time Central of short USDRUB short position as negative exposure to oil.
Bank was buying dollars and euros from the market, replenish-
ing its reserves, and overall making it a Russian version of global
extend-and-pretend game. domestic entities The strategy in proportion
were given
Sell 1 LCOF6 at current level (49.6)
In substance, domestic entities were given renewable source of
Sell 100k USDRUB at current level (65.6)
liquidity, renewable but not endless. The limit was set at USD
50b, so by June, when currency repos peaked to USD 35b - CBR
had to suspend yearly repos maintaining only short-term auc-
tions. Considering Q4 will bring another set of deadlines for
renewable source of Time Horizon:
Future expiry - 16-Dec-2015
liquidity, renewable
foreign debts payouts, totaling to nearly USD 35.5b, and in par-
Parameters:
ticular - USD 22b in December, demand for foreign currency is
We expect to gain around 1.4 Rubles to our opening price in
expected to rise, so the limit remains a concern.
the swap with USD upside risks hedged by the short exposure
Correlation restored? but not endless. in LCO Contract.
Management and risk description:

Speaking of RUB crosses, despite geopolitical premium is still of
The risk here is rollover costs for unrealized losses on USDRUB
a decent influence, the correlation of ruble vs oil prices looks re-
position (if any) exceeding the Tom/Next. We close positions,
stored. But how long will it last?
should LCOc1/USDRUB Ratio decline from current 0.723 to 0.5.
There are 3 basic scenarios in the model I am going to propose

onwards, based on the dynamics of oil prices: down, flat or up.
TF Click to read more from Kirill Samyshkin

Scenario 1.: Oil prices continue to slide. Ruble will naturally
start to decrease in value, but CBR, considering devaluation Click to see the charts in full size
NON-INDEPENDENT INVESTMENT RESEARCH DISCLAIMER
This investment research has not been prepared in accordance with legal requirements de- Any expression of opinion may be personal to the author and may not reflect the opinion of Saxo
signed to promote the independence of investment research. Bank and all expressions of opinion are subject to change without notice (neither prior nor subse-
quent).
Further it is not subject to any prohibition on dealing ahead of the dissemination of investment
research. Saxo Bank, its affiliates or staff, may perform services for, solicit business from, hold This communication refers to past performance. Past performance is not a reliable indicator of
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OUR

ESSENTIAL TRADES for Q4

Follow #SaxoStrats on:

We hope youll be inspired!

Kim Fournais Lars Seier Christensen

Emerging After Light

by Kim Fournais and by Steen Jakobsen by Ole S. Hansen

Rate Dollar bulls Fear

by Mads Koefoed by John J. Hardy by Simon Fasdal

Dark Wake-up And it

by Kay Van-Petersen by Peter Garnry by Kirill Samyshkin

Emerging markets have been bat-

The perfect storm raging through emerging markets

We see a ray of hope for commodity

No quick rebound Hedge funds operating in the US commodity futures market

#SaxoStrats been established, traders should be hesitant to get too bear-

The so-called currency

The ultimately fruitless wait for a

Growth of GDP in % for 2014, 2015* and 2016*

With Chinas efforts to move from an investment-led to

Homebuilders as proxy for stronger US economy

Housing sector slows materially. Strong Stronger US dollar.

Geopolitical tension. Larger-than-ex-

Septembers FOMC policy state-

We will shine the spotlight

EM currencies with a twist: trading EM against what?

As predicted, fear infected the mar-

Clearer picture on the back of substantial quantitative easing to levels where it is

UPDATE: Staying positive on Bullish on Europcar sharing programme #SaxoStrats

The cheap money that came out of

The third quarter of 2015 will be re-

Emerging markets will recover How to play equity markets

Many analyses In classic Wall Street fashion, the plunge in emerging-market

So, the Grand Finale has been post-

Correlation restored? but not endless. in LCO Contract.

Management and risk description:

There are 3 basic scenarios in the model I am going to propose

TF Click to read more from Kirill Samyshkin

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