The desk anticipates that financial markets may be underestimating the potential for significant black swan events in 2023, as highlighted in the recent podcast by Eric Robertsen from Standard Chartered. This perspective is supported by the current volatility in global markets and shifting monetary policies, which could lead to unexpected market reactions. Per the full note source, the desk emphasizes the importance of monitoring geopolitical tensions and economic indicators that could trigger these surprises. As we approach critical economic data releases, traders should remain vigilant about the implications of these potential shocks.
What the desk is arguing
The desk posits that the financial markets are not fully pricing in the risks associated with potential black swan events in 2023. This assertion is grounded in the analysis presented by Eric Robertsen, who suggests that geopolitical tensions and economic shifts could lead to significant market disruptions.
Supporting this view, the desk notes that recent market volatility has been exacerbated by central bank policy shifts, particularly in the U.S. and Europe, which could create an environment ripe for unexpected events. The current market positioning indicates that traders may be overly complacent, with a lack of hedging against potential downturns.
Where it sits in our coverage
Our consensus target for the EUR/USD is set at 1.075, with a range of 1.04 to 1.12. This aligns with the targets set by several firms, including: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.08 (Mar26)
The desk's view is slightly above the lower bound of the range, reflecting a more cautious stance compared to bofa, which is positioned at the lower end. This suggests a divergence in outlooks based on differing assessments of market risks.
How other firms see it
Several firms, including jpmorgan and citi, share a similar outlook, emphasizing the need for caution amid potential market shocks. Conversely, bofa takes a more bearish stance, suggesting that the risks of a downturn are more pronounced.
Traders should keep an eye on the EUR/USD trajectory, which is closely linked to the ECB's monetary policy decisions, as well as the evolving geopolitical landscape, particularly in Eastern Europe and Asia, which could influence market sentiment significantly.
What the calendar says
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Hello and welcome. I'm Aneesha Tank. Thanks for joining us for this very special look at the Global Surprises Report.
Another name for these surprises is black swan events. So, what are these? They're unpredictable and rare.
These shocks can cause serious disruption to markets and despite their unpredictability and rarity, they're still pretty relevant. If anything, understanding what might be on the horizon helps us to be better prepared. But could anything have prepared us for 2022?
We'll find out about that in just a moment. But first, let me introduce the author of the report. With me to explore possible surprises in 2023 is Standard Chartered's Head of Global Research and Chief Strategist, Eric Robertson.
Hello, Aneesha. Great to be with you again. I want us to cast our minds back to earlier in 2022.
We talked about the impact of war, the extremes of commodity price rises, food insecurity, and the raw edge for emerging markets. I'm curious to see what has changed over the last year. What was the most unpredictable event or events of the last year to rattle the markets?
I know I can think of a few. Yes, certainly has been no shortage of surprises. And unfortunately, in 2022, it's been mostly the unfriendly kind of surprise.
I suppose the biggest shock was the Russia invasion of Ukraine. When we were speaking in December and January of last year, that really wasn't on the horizon. And of course, we've had significant market volatility as a result of that, whether for oil prices and gasoline prices or for food prices.
It really has caused quite a bit of chaos in global markets and the global economy for the year. And that followed, obviously, the chaos of the Covid crisis. Another thing that we have kept an eye on over the past year was central banks.
And we've seen tremendous movement when it comes to policy, when it comes to rates. And a few words come to mind, fastest, most difficult for the markets, certainly for consumers. A lot's happened on that front.
Well, look, it has been in some ways a repeat of the playbook from the 1970s, which most people participating in the markets today were not in the markets at that time. So for most of us, it's been very, very new. But you're absolutely right.
We've seen an unprecedented surge in inflation globally to the highest levels in in some cases, 50 years. This has forced an extremely aggressive policy response from the central banks, which, again, has been the strongest in many decades. And so I think the uncertainty that we have faced in the markets has been higher than most people who are participating are familiar with.
And that's been a regime change in many ways. Eric, what about emerging markets? I understand from the report that references like it being the worst year on record across most asset classes.
When it comes to EM equities, they're underperforming the S&P by a cumulative 130% since January 2011. A lot of people would look at numbers like that and say, well, there's another thing that's unprecedented. If we go back to early to mid-October, when financial markets were really at their lows for the year, it was the worst year-to-date performance for most emerging market assets in decades, if not on record.
And you're absolutely right that over the last 11 years, emerging market equities have serially underperformed. But what's quite strange is that over that time, a number of emerging economies have actually performed quite well. And so what we're really left with as we start into 2023 is this world of the haves and the have-nots.
Those economies that are doing well seem to pull further and further away from the underperformers. And those who are underperforming are at risk of significant structural volatility that they are trying to work their way out of. So we really live in a very interesting and challenging environment for financial markets.
Yeah, and I can think of a few specific economies that have felt that in quite a harsh way over the last year. Do any of the events or events that we've talked about influence any of your thinking about the coming year? So the answer to that question is perhaps not obvious.
When I'm thinking about the potential surprises for 2023, what I'm really trying to do is force myself and hopefully the readers to think about those scenarios that at first glance might seem completely improbable, if not impossible. And what we're trying to say is, hang on a second. Actually, maybe the possibility of that event is higher than most people believe.
And so when we frame that argument, we're really in very simple terms saying, where is the consensus and where do we think the consensus might be too comfortable? Now, clearly past events have a big influence on what the consensus is. And I suppose if I think about the latest report, we're coming out of 2022 with the global economy and the global marketplace in really a very negative consensus.
People have been faced with enormous challenges and I think that is weighing on the consensus thinking. But a number of our surprises suggest, well, maybe the consensus is too negative and maybe there are some, quote unquote, black swans that are potentially quite good news. So you're absolutely right.
Previous events do have an influence in how we're thinking. OK, so we'll get to some of those quite good black swans in just a moment. One of the things that I've been thinking about recently has been whether or not people are going to start questioning, particularly in developed economies, the infatuation with supply side policy.
And on that, I wanted to ask you, what are some of the supply side policy surprises that you might be thinking about for the coming year? We live in a world where a lot of the assumptions that we have worked with over the last 10, 20 years are being called into question and nowhere more so than what is considered a smart or orthodox policy response. And we've seen that after Covid, where different economies chose to support their populations and businesses with monetary stimulus or fiscal or some combination of the two.
And then as we've come through 2022 and we're dealing with the implications of the military conflict in Ukraine, again, we're seeing a wide variety of policy combinations. Now, you could argue, for example, that the US response to Covid, which was to put money directly into the pocket of consumers, contributed to the inflation problem that we have today. You could also argue that some of the policy responses that we've seen in China have contributed to a significant downturn in consumer confidence because they chose not to directly support the consumer, but to try and support the economy in other ways.
So I think all policymakers globally are going back to the drawing board and trying to figure out what policies make sense and what may actually work in the current environment. But digging a little deeper on supply side, let's talk about central banks interest rate expectations. So something that was in the report that caught my eye was 200 basis point cut from the Fed.
Really? Let me be very clear here, because I don't want to be accused of forecasting this. Our view for 2023 is that after an aggressive rate hiking cycle of the last year, the Fed may cut interest rates once or twice by the end of the year, where the market is at the moment is to expect well over 100 basis points of cuts in 2023 and 2024.
And we've argued that that's too aggressive because our baseline view is that there will be an economic slowdown, but it will be benign. And this particular surprise scenario suggests that maybe we are all too comfortable with a benign slowdown. Maybe the reality is that unprecedented monetary tightening all of these rate hikes from around the world is going to do real damage to the economy.
And maybe we just haven't seen it yet, but maybe that's coming down the pipeline. And there is a chance that the Fed may panic. And I say that because one of the things that is now accepted wisdom in the market is that the Fed was very slow to acknowledge the surge in inflation.
So maybe it's not so hard to imagine that the Fed will underestimate the downturn in the economy as well. Obviously, how the economy moves will have quite an influence on commodity markets. Something that you bring up is the idea first of a crashing oil price, but then a soaring gold price.
So let's start with oil. Sure, absolutely, Manisha. Let me make one other point, which is that for anybody looking at our list of surprises, they will look intellectually inconsistent.
In other words, there are a few surprises which completely contradict each other. And that's OK, because we're trying to look at them each independently. So if we start with oil, there is, in our view, an assumption that as the global economy reopens from the covid crisis, as China reopens from zero covid lockdowns, that the demand for energy will continue to increase and that that will lead to a sustainably higher oil price.
Some forecasts have oil going back well above $100 a barrel. What we've tried to look at with this potential surprise is what if the economy globally goes into a deep recession? And what are the implications for the demand for travel, the demand for capex spending and investment spending?
What if all of those factors are much worse than we anticipate? And what if actually the supply of oil is really in excess of the potential demand? And if we do go into a severe global recession, as we've seen in previous business cycles, one of the first things that takes a hit is oil prices.
The base case that many people have is that oil and a number of the energy markets will be extremely well supported here with potential upside. And I think there's some risk to that view. We're living in a world which is somewhat different to the world we might have witnessed 20 years ago, 40 years ago.
To what extent are these expectations of the oil price, for example, influenced by what we've seen before? Or are you beginning to see a new paradigm emerge in terms of how you think about these things? I think you've got a couple of really good questions wrapped up in there, Manisha.
The first of which is, has the global economy and its need for oil or usage of oil changed? And one of the things that we've observed is that developed economies have actually become a lot better about the efficiency of their oil consumption. And in some cases, oil demand has actually come down.
And so they're making do with less energy or they're just using the energy they do have more efficiently. But the other side of the coin is that emerging economies, which are growing, are using more energy. And that's part of going from a lower income status to a middle income status to developed economy status.
That's all very normal in the evolution of an emerging economy. And you can't say to an emerging economy, we don't want you to grow anymore because we don't want you to use more energy. And so there's this tug of war that's going on.
The other factor is that the desire for most of the global economy to move in the direction of net zero is, I think, often misinterpreted as a death sentence for commodities. And we don't think that's the case. To achieve more sustainable forms of consumption will actually require a big upfront investment in a lot of basic materials, including energy and base metals.
So I think there's a structural demand for commodities that is ongoing, even with a number of economies in the world moving towards net zero. So I think that's creating some confusion for how people think about it. Let's talk about gold, because you've got a really interesting scenario there, the possibility of a soaring gold price.
Where is this coming from? One of the fascinating aspects of the last three years and what I'm talking about specifically is the COVID crisis and how we've come out of that, or largely come out of it, and then the military conflict in Ukraine as well. Gold had performed extremely well in the immediate response to COVID.
But as central banks started raising rates aggressively, we've seen gold lose quite a bit of sponsorship and appeal just because of rising interest rates. Now, that makes sense to us. But the other thing that's happened, it really exploded during the COVID crisis, was this demand for crypto and digital currencies, which were heralded and still are by some people as the new safe haven asset.
We think we've observed some significant shifts out of more traditional safe havens like gold or certain currencies into crypto. Now, over the last year, crypto and digital assets have had a significant reversal. Well, how much further can they go?
And we would argue that if you go back to where Bitcoin was before COVID, actually, there's still quite a bit of downside. And I think we could see a swing back in sentiment away from digital assets to more traditional safe havens like gold. And if that were to happen, I think gold has quite a bit of upside.
So it's this tug of war between traditional safe havens and more digital safe havens. That was one of the aspects of this report that the media have become quite excited about, actually, this discussion around Bitcoin. Do you think that that is indicative of anything as we look ahead for the year?
Oh, I certainly do. Any time there is a technology, a scientific breakthrough, a financial market breakthrough that is disruptive and that digital assets and crypto, all of these things have been disruptive, there's always going to be quite a bit of volatility. And one of the things that I do believe that we are seeing at the moment is an evolution towards who the long term players will be and which ones will not survive.
And by the way, we've seen this movie before. We saw this during the tech bubble in the late 1990s and early 2000s when the tech bubble burst. It would have been incorrect to say that that was the end of the Internet and the end of Internet related companies.
But what it did show us is that some would survive and some would not. And predicting which ones would and which ones would not was actually the most important exercise to go through. I think it's going to be the same thing this time around.
I don't think anybody is suggesting that digital assets as a concept will not survive. They will. But the question is, in what form?
Which companies have got the right formula? Which central banks will have the right adoption practices? So I think we're going through a very important process that will take a few years to resolve.
But I don't think even in the surprise scenario that I described, I don't think even that is necessarily a death sentence for crypto. It's part of the evolution. Let's talk about FX.
I know you've got some pretty interesting possibilities in the report here. Let's focus on Eurodollar first of all. The first thing to say about some of these FX surprises is that the US dollar has actually been on a fairly consistent appreciation trend for the better part of the last 10, 11 years.
And what we have started thinking about is what are those scenarios where maybe the dollar doesn't do so well? And the first question that people always say is, OK, well, I can get my arms around that, but the problem is I don't know what currencies I would actually want to own. And one of the first things that people say is, I can't imagine owning the euro because the euro area economy is always underperforming.
There are structural inefficiencies. The system doesn't work. The legacy of the Russia invasion of Ukraine and all of the implications there.
People are just serially negative on the euro. And we've argued, and by the way, this was a surprise last year that did not come to fruition. But we are trying again with this idea that maybe one of the upside surprises in a more benign world is that actually the euro attracts quite a bit of investor and corporate interest and perhaps has a good 20% rally in front of it.
I think it would certainly surprise most people. OK, let's talk about some political surprises. I know that you have been looking at the United States and possible political scenarios.
We do actually think that there are some political developments that may catch people off guard. And that's the Republicans now in control of the House have the ability to launch an impeachment proceeding against Biden. Now, impeachment proceedings go dead in the water when they hit the Senate because the Democrats still control the Senate.
But that doesn't mean that there won't be some serious headline risk from the Republicans announcing impeachment proceedings. I think that would catch a lot of international observers off guard. And I think that might actually force people to question this idea of U.S. exceptionalism as well.
I think something a lot of people didn't predict in 2022 was the way that the midterms were going to go. I'm curious to what extent that is influencing your look ahead for 2023. If I look at the polls that were used to guide people's opinions about how the midterm elections would play out, there was an assumption, I think, that was ingrained in the market mindset that the Republicans would have this red wave where they would take back not only the House but the Senate.
And you were going to be faced with quite a contentious or controversial even final two years of Biden's administration. I think it has been a surprise to people that the Republican red wave was actually quite underwhelming. And I think that's probably going to energize the Republican base in the sense that they will say, OK, we have an opportunity in the two years between now and the presidential election in 2024 to really stir the pot and to really try and get people to question the credibility of the Democratic administration, get people to rally around the Republican cause.
And so I think that in many ways, the Republicans are going to look for any opportunities to try and stir the proverbial pot going into the next presidential election. So that's where that thinking comes from. I want to talk about the people, the things that affect us on the ground, social surprises and what could really upset the mood.
One of the things that you cited in the report is around global food prices. So what's interesting here is global food prices collapse. This is what you put in the report, fueling deflation fears.
Now, people who were dealing with surging prices of food may say, well, how is that a bad thing? But then you have the deflation aspects of this. Can you just walk us through what this Black Swan event could look like?
Absolutely. You're 100 percent correct that the surge in both food and energy prices was for many voters, for many of the, quote unquote, people on the street that you described, it was the only important political issue that they wanted to talk about this year. But for governments, that was and remains for some an incredibly challenging dilemma, which is we have a number of financial obligations, but one of them is making sure that our people have sufficient food and energy.
The way we're thinking about this is that because of the last few years, the supply chain problems, military conflict, there has been a growing consensus that the commodity markets and in some cases the food markets are increasingly vulnerable and therefore the bias to prices should be higher. And what we've tried to suggest with this particular surprise is that what if things everywhere go better than expected? What if the Russia-Ukraine conflict is somehow resolved either partially or in full?
What if the supply chains ease up and all of the food and agricultural supplies, including things like fertilizer, are actually more than available? And we go into a period where there's excess supply of these products. Now, you're right, for the man on the street, lower food prices is a good thing.
But for a number of economies, there are real downside risks to a loss of pricing power. For many economies, food exports or energy exports are their number one source of revenue. So if food prices collapse, that may be good for the man on the street, but for a number of countries, that could be a real problem.
So I think there's a couple of ways to think about that scenario. OK, Eric, last question. Overall, if one is least likely and ten is most likely, where on the scale do you pitch your expectations for unpredictability in 2023 and why?
I certainly feel like there's the potential for a great deal of disruption around, but am I wrong? No, I think you're 100% correct. But I think, for lack of a better word, the symmetry is a little bit different going into 2023.
In other words, if I look back with the benefit of hindsight to 2022, it just felt like all of the surprises were in the negative direction. It was always a question of how bad could this actually get. And so if we think about a distribution of outcomes from a statistical point of view, they were all to the left-hand side.
We talked about left-hand side tail risk. I think what's interesting about 2023 is I can imagine significant surprise in both directions. So I think the symmetry is more neutral, but that doesn't mean I'm thinking that the volatility will be less.
So on your scale of 1 to 10, I would still put us in a 7 or an 8. But I guess the good news is that there are scenarios where that 7 or an 8 in terms of unexpected event is potentially positive as well as negative. So lots to think about.
OK, you surprised me because I thought maybe you'd choose a 5. But how interesting, 7 or 8. Well, look, it's been an absolute pleasure.
I just want to check, was there anything else that you wanted to share? I think your final question actually took us where we needed to go, which is how do we think about the likelihood of uncertainty? And this has become, in some ways, a cottage industry in financial markets and banking.
But I do think we now live in a world where volatility is higher in both directions. I think the unprecedented has become normal. And we've seen that with Covid, with some of the military conflicts and the geopolitical tensions.
But I think we do now live in a world where we just need to accept that what was previously considered a once in a lifetime event could now be something that happens on a regular basis. So I think we need to be prepared for the idea that volatility is the new normal. OK, well, we have to leave it there, unfortunately.
Eric, it's always a pleasure. Thank you so much. And also to our audience, thank you for listening.
Please do give us your feedback from me and the team. Goodbye for now.