FYI | Dec 11 2017
Saxo Bank suggests ten events that could derail global markets next year which few would be expecting.
By Greg Peel
Each year Saxo Bank publishes a list of predictions which focus on “a series of unlikely but underappreciated events which, if they were to occur, could send shock waves across financial markets”.
Saxo had believed 2017 would be a volatile year, given the shock of Brexit and the seemingly impossible rise of Trump. But instead we’ve seen a year of “outrageously smooth sailing” that has inflated risk assets around the world without incident. But the reality of long periods of low volatility is that they typically lead to future volatility as investors underestimate risks and expect simply more of the same.
It is important to note none of the below is Saxo Bank’s official market outlook.
1 The Fed loses independence and the US Treasury takes charge
Both Republicans and Democrats vie for an increased share of the populist vote at the 2018 mid-terms and in so doing budget discipline is entirely absent. Republican tax cuts lead to a massive revenue shortfall which worsens as the US heads into recession. Faced with a weak economy, higher rates and higher inflation, the Fed has no answers. Treasury enacts emergency powers and caps the long bond yield at 2.5%, as it did after World War II.
2 Bank of Japan forced to abandon yield curve control
The Bank of Japan’s policy of yield curve control relies on low global rates and in 2018, rates rise. As inflation rises, yields will spike, and the result will be a fantastical plunge in the yen and a return to BoJ QE.
3 China rolls out the Petro-Renminbi
China is the largest importer of crude oil and many producer nations are happy to transact in renminbi. Given the success of Chinese commodity futures to date, China launches a renminbi-based oil contract and it is a runaway success. The renminbi appreciates more than 10% versus the US dollar.
4 Volatility spikes after flash crash in stock markets
The collapse of volatility seen across asset classes in 2017 has been remarkable, with historic lows in the VIX matching record highs in stocks and real estate. The result is a powder keg that is set to blow sky-high. The S&P500 plunges -25% in a day, a la 1987, and a swathe of short volatility funds are wiped out. A formerly unknown long volatility trader returns 1000% and becomes a legend.
5 US voters go hard left in 2018 election
Millennials are already a larger demographic in the US than Baby Boomers. A general revulsion of Trump among the young, an even wider inequality gap thanks to Republican tax reform and a new breed of Democrat candidates tapping into Sanders-style populism see Millennials turning out to vote in droves in November. The Democrats implement spending stimulus, deficits be damned. The US 30-year yield soars through 5%.
6 Austro-Hungarian Empire threatens EU takeover
The divide between old core EU members and newer members of the bloc will widen to an impassable chasm in 2018 and for the first time since 1951, Europe’s political centre of gravity will shift from Germany-France to Central Eastern Europe. The euro spikes to new highs before weakening towards parity with the US dollar.
7 Bitcoin is thrown to the wolves
Bitcoin surpasses US$60,000 in 2018 with a market capitalisation of US$1trn post the December 2017 launch of futures contracts, which funds are more comfortable trading rather than tying up money in crypto-currencies [Note: the bitcoin contracts will be US dollar cash settled, bot bitcoin settled]. However, Russia and China move to prohibit non-sanctioned crypto-currencies and bitcoin crashes, falling to its “production cost” of US$1,000 in 2019.
8 Southern African Spring sees South Africa blossom
The forced resignation of Zimbabwean president Robert Mugabe triggers a wave of political change across sub-Saharan Africa. South Africa’s Jacob Zuma is forced out of power and Congo’s Joseph Kabila is forced to flee the country. South Africa is the main winner as the rand rises 30% against other currencies. South Africa and satellite economies post the world’s strongest rates of growth.
9 Tencent topples Apple as market cap king
China has been opening up its capital markets and reform programs are driving a rise in investor sentiment. Chinese tech company Tencent’s share price has rocketed 120% in 2017 and is now in the global top five by market cap, at one point eclipsing Facebook. In 2018 Tencent’s price gains another 100% despite already enormous size, knocking off number one Apple at well above US$1trn.
10 It’s their time – women crash the glass ceiling
US universities are now graduating 50% more women than men at bachelor level. Women now comprise almost half of all business graduates. In 2017, only 6.4% of CEOs in the Fortune 500 list are women, despite earning more on average than their male peers. Women will begin to realise their desired potential because it is practical, not simply “fair”, providing for economic growth in low-productivity, aging developed countries without growing the population. A woman occupies the top spot at more than 60 Fortune 500 companies by end-2018.
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