Europe, U.S. Market Risks Are Back to Front, Saxo Bank Says

(Bloomberg) -- The market is overestimating political risk in Europe and underestimating the chances of a U.S. recession, according to Saxo Bank A/S.

Risk premiums in the euro and European assets are likely to disappear after the French election, said the Danish bank’s chief investment officer Steen Jakobsen. The region’s economic growth can outperform the U.S. over the course of Donald Trump’s presidency as excessive expectations about his reflationary policies are fading, he added.

“Unless there is a huge increase in immigrants coming to Europe, the European elections are a non-event,” Jakobsen said in an interview in Tokyo March 27. “Right now the cheapest and most mispriced assets in the world are European assets, European currency, French equities. If it weren’t for the French and German election discount, the euro would have been trading at $1.12-$1.13 already.”

The risk premium on France’s debt over German bunds has doubled to 62 basis points since the end of June, partly reflecting concern that the anti-euro National Front’s Marine Le Pen could win power. The euro has fallen about 4 percent against the dollar over the same period.

Jakobsen was more bearish than the market consensus on the outlook for the U.S. economy. He saw a 60 percent probability of a U.S. recession within the next 12 months compared with a 15 percent chance in the latest Bloomberg forecast. He thought the U.S. dollar expensive and said investors who are dependent on U.S. markets as “a reservoir” for excess capital are at risk. The Bloomberg dollar index suffered its worst quarter in four as the reflation trade took a further beating after Trump’s failure to push through his health-care bill triggered concerns over his economic stimulus plans.

ECB Governing Council member Erkki Liikanen said in an interview this weekend that President Trump’s economic policy is "still lacking facts and details.”

Since the November election, the S&P Index gained about 12 percent to a record high at the beginning of March and closed about a percent below it on Thursday. The 10-year Treasury yield rose to a two-year high of 2.64 percent in mid-December before falling back to around 2.42 percent. The Saxo Bank CIO remains bullish on U.S. fixed income.

“I like the government sector because it’s overpriced, inflation is overpriced, recession risk is overpriced, the reflation/Trump trade is overpriced,” he said.

Saxo Bank was established in 1992 and last year held client collateral deposits of 92.3 billion Danish krone ($13.3 billion) according to its most recent annual report.

To contact the reporters on this story: Chikako Mogi in Tokyo at cmogi@bloomberg.net, Daisuke Sakai in Tokyo at dsakai2@bloomberg.net.

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Cormac Mullen, Patricia Lui