Summary: After the ultimate black swan event of the coronavirus pandemic, what risks will investors face next year? According to Standard Chartered's list of potential market surprises for 2021, there will be plenty.
After the ultimate black swan event of the coronavirus pandemic, what risks will investors face next year? According to Standard Chartered's list of potential market surprises for 2021, there will be plenty.
Democrats winning control of the Senate, an easing of Sino-U.S. relations pushing the yuan to 6 per dollar, or the collapse of OPEC driving oil prices to $20 a barrel. According to Eric Robertsen, the bank's global head of research, these are among eight "unlikely" events that would disrupt markets if they occurred.
Last year, the coronavirus pandemic was not on the risk list, but with emergency fiscal and monetary measures, global markets have largely recovered from the shock. Investors have reached some consensus that economic growth and inflation will recover as the new year begins, pushing global yield curves steeper, corporate bonds higher, and the dollar lower.
Robertsen therefore believes the biggest blow would be setbacks in vaccination efforts.
He wrote: "As some risk-trading indicators return to pre-pandemic lows, the 'reflation' consensus seems particularly vulnerable to bad news." As for last year's "non-zero probability" events, Robertsen's views were indeed convincing: he predicted that the Fed would cut interest rates significantly, that central banks would expand asset purchase programs, that gold would rise to $2,000 per ounce, and that the S&P 500 would approach a 20% gain. Here is his latest tally of underestimated risks for next year:
1. Democrats win Georgia seats and control of the U.S. Senate. Democrats put forward a legislative agenda to raise taxes and target regulatory reform in the tech sector.
Impact: Tech stocks tumble, U.S. Treasury yields surge.
2. China and the U.S. find common ground. China agrees to let the yuan appreciate to boost the purchasing power of Chinese companies and consumers.
Impact: USD/CNY falls to 6.00.
3. Monetary and fiscal stimulus drive the strongest recovery in a century. Investors and traders eager to profit from real assets move more funds into markets such as copper.
Impact: Copper rises 50%.
4. OPEC splits. To fill fiscal gaps, oil-exporting countries abandon supply quotas, and OPEC cooperation collapses.
Impact: Oil prices fall back to $20 per barrel.
5. Hope for a European fiscal stimulus plan fades. With policy rates at zero and the balance sheet near 100% of GDP, the ECB's capacity to support recovery is increasingly questioned.
Impact: EUR/USD falls to 1.06 by mid-year.
6. U.S. Treasury secretary abandons strong-dollar policy. When Congress fails to cooperate on a fiscal plan, Treasury Secretary-designate Yellen would ease financial conditions by pushing the dollar lower.
Impact: Dollar drops 15%.
7. Emerging-market debt defaults and sovereign rating downgrades. Corporate debt defaults begin slowly, then spread to government-backed entities, leading to downgrades.
Impact: Emerging-market equities fall 30% in Q2.
8. U.S. President Biden steps down. Frustrated by his failure to bridge the divide between Republicans and Democrats, and under pressure from escalating protests and social unrest, Biden resigns in favor of Vice President Harris.
Impact: U.S. stocks undergo a major correction, credit spreads widen, and the dollar's decline accelerates.