Istanbul/London — Markets’ black swans are rapidly turning gray.
Brexit, the election of Donald Trump and a faltering bull market in
bonds have all helped elevate analysts’ 2017 tail risk predictions from
the status of colourful festive reading to a cause for sleepless nights.
Analysts at Nomura are the latest to throw their hat in the ring —
warning investors to be prepared for "unlikely but impactful events"
including the possibility of capital controls in emerging markets, a
long-elusive pick-up in Japanese inflation and a Federal Reserve at
loggerheads with the US government.
"Needless to say, none of them are our base case," the analysts say.
Of course, investors scarred by the turmoil of 2016 know that doesn’t necessarily mean that they won’t happen.
Here are Nomura’s 10 events that could end up roiling your 2017.
1. Russia on the warpath
A staple of gray swan lists since Vladimir Putin’s annexation of
Crimea two years ago, Russian military aggression in Eastern Europe
remains one of the big risks for 2017. While an actual military invasion
is unlikely, the foundations may be laid next year through anything
from changes to US foreign policy, to the election of populist leaders
in Europe, according to Nomura. Position for risk by going long
credit-default swaps of any of the Baltic nations, shorting credit and
trading Poland as a negative proxy.
2. A surge in US productivity
As Fed officials make the case that the president-elect’s fiscal
stimulus should be targeted at increasing productivity, Nomura says a
pick-up in research and development investment could already be laying
the groundwork. Like the tech boom of the 1990s it would catch
forecasters unaware, but could have implications ranging from a faster
series of rate hikes to a sustained boost to equities if it
materialises.
3. China floats the yuan
As recent outflows suggest, a balance-of-payments shock could follow
hasty moves to liberalise the currency regime of the world’s
second-largest economy. The probability China gets to that goal in the
next 12 months is "very low", Nomura analysts assert, but prepare for
yuan weakness if it happens.
4. An exit from Brexit
UK Prime Minister Theresa May said she will trigger the process of
leaving by March of next year, and her favoured "Brexit means Brexit"
catchphrase makes it sound like she means it. But there are two big
upsets that could appease the 48%: the case being heard by the UK’s
Supreme Court might trigger a general election, were it to galvanise
pro-EU sections of parliament, while — in an attempt to assuage further
break-up — the EU could also grant the country face-saving concessions.
5. Capital controls in emerging markets
Emerging markets may face "pronounced outflows" in 2017 if Trump’s
planned stimulus spending sends US yields higher and further strengthens
the dollar. That could prompt policy makers to take action, and they
might even co-ordinate in a collective rebellion against the US.
Countries most at risk are those with volatile currencies, low currency reserves and relatively low rates.
6. Japanese inflation jumps
What if the market is wrong to price in a moderate pick-up in
Japanese inflation next year? A sharp rise — potentially triggered by
the collision of higher oil prices and a weaker yen — could prompt the
Bank of Japan (BoJ) to take action by lifting its 10-year yield target
of zero percent. Such a shift could have a global effect because both
inflation and global core bond yields are highly correlated.
7. A clearing house crisis
The systemic risks that stem from the clearing houses that were
themselves introduced to contain systemic risks are not new to
regulators: financial stability watchdogs are already taking measures to
deal with any potential fallouts.
"The interplay between struggling banks, collateral squeezes, [and]
sharp market moves in an overpriced market with central counterparties
at the centre" could potentially lead to a crisis, in Nomura’s
worst-case scenario.
8. Trump takes fight to the Fed
The Fed chairwoman has indicated that she will stay her term. Yet
Janet Yellen was on the receiving end of some harsh invective during the
future president’s campaign, and Nomura considers a change to the
bank’s mandate to be among 2017’s outlying risks. More likely is that
Trump could name sympathetic board members when present appointments
expire. Higher policy rates could ensue.
9. Abenomics comes unstuck
The most likely outcome of a general election in Japan is that Prime
Minister Shinzo Abe’s support will be solidified. That means that
anything fracturing this stability will come as a big shock to the
market. A weakening of Abe’s hold on power could cause Abenomics trades
to be unwound, with Japenese equities bearing the brunt of the pullback.
10. The end of cash
It seems inevitable that electronic payments will replace notes and
coins at some point, but Nomura picks up on one reason why it might
happen sooner rather than later: negative yields. Electronic money would
prevent potential savers stashing money under their mattresses to avoid
sub-zero interest rates. The risk to this scenario is, of course, that
savers get hurt and consumers start inventing new hard currencies.
Bloomberg
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