By Jamie McGeever
ORLANDO, Fla.- As some banks publish their semi-serious market predictions for the year ahead, the utterly wild ride that blindsided everyone in 2022 suggests that, this time around, they should perhaps indeed be taken semi-seriously.
After all, this time last year it is safe to say double-digit inflation in the West, the most aggressive US monetary policy tightening cycle in 40 years, Japanese FX intervention to buy yen, and by some measures the biggest ever crash in government bonds were not consensus calls.
But war in Europe changed everything. The global macro, policy and political mix dynamic has never been more uncertain, and standard economic and market models based on mean reversion and historical precedence have rarely been less useful.
It is against this backdrop that Saxo Bank and Standard Chartered have released their extremely-out-of-consensus ‘Outrageous Predictions’ and ‘Market Surprises of 2023’ forecasts, respectively.
As analysts at Saxo note, these are “unlikely but underappreciated events which, if they were to occur, would send shockwaves across the financial markets as well as political and popular cultures.”
Standard Chartered’s global head of research Eric Robertsen makes clear: “These scenarios are independent of each other. They are not intended to be economically or intellectually consistent with each other.”
Standard Chartered’s are a little more market-specific, and Saxo’s veer more into the political sphere.
Yet what is striking about them is how many seem fairly plausible. The offshore yuan rising to 6.40 per dollar or the euro rising to $1.25? The Nasdaq falling another 50 percent? President Biden impeached, the creation of a joint European Armed Forces, or widespread price controls to cap official inflation?
Given the political, economic and financial market turmoil of the past 12 months, none of these scenarios over the next 12 could be completely ruled out.
What’s more, some of these two banks’ previous bold predictions have actually come to pass. A small percentage, granted, but they are the low-probability/high return bets that can make a trader’s or analyst’s career.
Let’s take a few of these predictions, starting with Standard Chartered’s yuan and euro calls.
The yuan at 6.40/$ would require it to appreciate around 9 percent from current levels, not that controversial given that it weakened 9 percent last year. Plus, it was trading at 6.40/$ only eight months ago.
Is that any less likely than billionaire hedge fund manager Bill Ackman’s well-publicized bet that the Hong Kong dollar’s 39-year-old peg to the US dollar will soon break? Almost certainly not.
Similarly, the euro rising a further 20 percent to $1.25 is not so outlandish considering the currency was at a 20-year low as recently as September and has already recovered 10 percent since then.
The economic, financial and political foundations for that recovery might be harder to build, but if peace in Ukraine comes as suddenly as war did, you wouldn’t bet against it. Deutsche Bank’s baseline 2023 economic outlook even has euro zone growth outpacing US growth next year.
Even continued war and geopolitical tension could send the euro to $1.25 if, as per Saxo Bank, a ‘united Army of Europe’ is founded. The thinking goes like this: the new Armed Forces are funded with 10 trillion euros of new bonds based on member country’s share of overall GDP, delivering a huge investment boost and significantly deepening EU sovereign debt market integration.
If inflation tripped up many people this year – not least central bankers – who’s to say it won’t next year too? The extreme forecasts would be rampant inflation or a sudden collapse into deflation, and recency bias suggests spiraling inflation would be less of a shock for markets.
