SAXO BANK’s “shock forecast”….

Sunlight shines on the historic buildings of the financial district in lower Manhattan, New York City near Wall Street

5%: In 2018 Saxo Bank expects the risk of US Treasury bond yields falling below 5%

BLOWING RATES, BULL, LOWER EURO, AFRICAN SPRING… THE 10 SHOCK FORECAST OF SAXO BANK FOR 2018

As every year, Saxo Bank delivered its “shock forecasts”, scenarios that are not as improbable as you might think… and that could have a significant impact on the markets if necessary.

Saxo Bank’s shock forecasts are made by deliberately ignoring any consensus that soothes it, such as “everything is fine, Madame la Marquise”, “year n will be the continuity of n-1” or “sleep easy, little ones”. No, the idea is to highlight the risks of improbable events which, if they occur, will have a major impact.

This is called the Black Swans from the name of Nassim Taleb’s famous book.

 

Contrary to what was imagined, “shock forecasts” do not correspond to a central scenario, but to events whose probability is currently largely underestimated by the participants – and therefore whose possibility is not yet integrated into the prices. They could thus have, if they were to occur, a major impact on the markets….

Which of these 10 forecasts for 2017 have materialized?

Several of the shock forecasts for 2017 have materialized. Italian banking stocks performed well, with players such as Unicredit and Intesa Sanpaolo having experienced a generally more favourable stock market performance than that of French financial heavyweights. In addition, after being affected by the election of Donald Trump, the Mexican peso recovered significantly, particularly against the Canadian dollar, as the currency pair appreciated by 24% between the low point in January and the peak in June. Finally, the explosion in the price of bitcoin has indeed taken place, exceeding by a considerable margin the “simple” three-fold increase mentioned in our latest shock forecasts (its price has increased almost 13-fold, at the time of writing)….

 

The first is that of an “African spring”. After the palace revolution in Zimbabwe, a possible change of power in the Democratic Republic of Congo and South Africa would have a positive impact on the continent’s economy and markets.

Beijing could launch a first futures contract on oil in yuan. The dollar would suffer the blow, depreciating against other major currencies, while China would become the world’s largest importer of black gold.

The Federal Reserve – the US central bank – would lose its independence from the government, thus promoting a jump in long-term interest rates. The yield on 10-year government bonds would thus rise from the current 2.2% to 3.5%.

The Bank of Japan – Japan’s central bank – would relinquish control over the interest rate curve, raising long-term rates in the archipelago. The Bank of Japan would then devalue the yen, which would fall to 150 per dollar from the current 112. Later, however, the Japanese currency would recover, rising to 100 yen to the dollar.
While volatility in US equities (measured by the VIX, a fear barometer, which historically tends to move in contrast to Wall Street, NDLR) has fallen to historically low levels, it could jump in 2018, resulting in a flash crash (flash crash, NDLR) on US equities, with a drop of up to 30% on the flagship S&P500 index.

In response to Donald Trump’s policy, the mid-term elections next November in the United States could mark a shift towards left-wing populism, which would complicate the Republican President’s task. As a result, 30-year interest rates on treasury bills could rise to more than 5%, from the current 2.8%.

While France and Germany are currently showing their willingness to deepen European integration, including the preparation of a common budget and treasury, the two heavyweights of the European Union could encounter a hostile reaction from the Member States of Central and Eastern Europe, which would resort to a blocking minority. This would lead to political paralysis that could have a significant impact on the euro.

Moscow and Beijing could adopt a state cryptocurrency, a virtual currency that would compete with Bitcoin. The latter would thus be much less in demand, with a significant drop in its price.

Tencent, China’s leading social network (its WeChat instant messaging application has 980 million active users per month and 38 billion messages per day, editor’s note) and Chinese video game designer, which recently reached the $500 billion mark in market capitalization, could surpass the $1 trillion mark, giving it a higher value than Apple…

Finally, women could break the “glass ceiling”, thus occupying more and more positions of responsibility within American firms. This evolution would be positive for American growth, since according to some studies, women manage companies better than men.

The conclusion

We dance on volcanoes, they are multiple. Everyone who is objective knows this.

2018 can happen like 2017. Good. And let’s hope that 2018 goes well. But from a war with North Korea to a new war in the Middle East, to banking or market risks, to the euro, to the dollar and international disagreements, I can make you a Prévert list of the risks hanging over our heads.

So, as always, let’s hope for the best, my friends, but let’s prepare for the worst.

It is already too late, but not all is lost. Get ready! Get ready!

Sources : Nicolas Gallant, Capital

Maël MARTIN


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