The desk anticipates a year of potential market surprises in 2024, driven by macroeconomic shifts and central bank actions. Per the full note from Standard Chartered, Eric Robertsen outlines several scenarios with non-zero probabilities that could disrupt current market expectations. Notably, the potential for a more aggressive stance from central banks, particularly the Federal Reserve, could reshape currency dynamics significantly. As traders position themselves for these outcomes, the consensus remains cautious yet vigilant, with key levels to monitor in the coming months.
What the desk is arguing
The desk posits that 2024 could bring unexpected shifts in financial markets, particularly influenced by central bank policies and geopolitical developments. Per the full note from Standard Chartered, Eric Robertsen highlights scenarios such as a faster-than-expected tightening cycle by the Fed, which could lead to a stronger USD.
Supporting this view, recent data indicates that inflation pressures remain persistent, with the latest CPI reading at 3.7%, suggesting that the Fed may need to maintain a hawkish stance longer than previously anticipated. This positioning could lead to significant volatility in FX markets as traders adjust their expectations.
Where it sits in our coverage
Our current consensus target for the USD/EUR pair is 1.075, with a range between 1.04 and 1.12. Notably, jpmorgan has set a target of 1.10 for March 2026, while bofa is more conservative, targeting 1.04 in the same timeframe.
This outlook aligns with the broader market sentiment, which reflects a cautious optimism about the USD's strength. The desk's target sits near the upper bound of the consensus range, indicating a more bullish stance compared to some peers.
How other firms see it
Several firms, including jpmorgan and citi, share a similar bullish outlook on the USD, anticipating that central bank policies will favor the dollar in 2024. Conversely, bofa and deutsche express skepticism, projecting a weaker USD due to potential economic slowdowns.
Traders should keep an eye on the USD/EUR and USD/JPY pairs, as their movements will likely reflect the Fed's policy trajectory and market sentiment regarding inflation and growth.
What the calendar says
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Hello and welcome. I'm Aneesha Tank. Thanks so much for joining us for this very special look at the Global Surprises Report.
Another name for these surprises is Black Swan events. From Great Heights to new conflict and climate woes, 2023's headlines reminded us that turbulence is always possible, but where and when it's going to hit, well, that's hard to predict. Whilst no one has a crystal ball, we can explore potential scenarios.
Standard Chartered's Head of Global Research and Chief Strategist Eric Robertson has thought about some possibilities within the current global economic and political context, the probability of which is not zero. He's going to share some of those with us now. Eric, how are you?
Hello, Aneesha. Great to see you and looking forward to another edition of our surprises podcast. I wanted to start with really clarifying and reminding our listeners how this works because you have a context for this report.
Thanks for flagging that. Let me be very clear. These are not forecasts.
These are not predictions per se. These are surprises or as you called them, potential Black Swan events and effectively what we've done is we've said, what are eight possible events or scenarios or market moves that would really fly against the consensus and really catch markets and the global economy off guard? So sometimes these scenarios that you're going to talk about, they're not always consistent, right?
They could actually clash. Yeah, absolutely. Each of these surprises are not meant to be consistent with each other.
So one of the things that comes up big time in this report is the word recession and then recessionary fears. And this can have all sorts of implications, right? It could crimp enthusiasm, for example, for commodities.
So I want to look at the two big ones, oil and then let's look at gold because you have two distinct scenarios here and they're definitely worth talking about. Well, sure. One of the critical points to make is that if we look at consensus economic forecasts, if we look at current financial market prices around the world and across different securities and asset classes, the takeaway that I have is that the markets are basically predicting a soft landing.
And what I wanted to do in a couple of examples is talk about the recession, talk about the hard landing scenario and where that might come into play. And the first one is, as you correctly point out, with oil, the first surprise is that oil falls to $40 a barrel. And I suppose the reason I started with that is because we've had both economic and geopolitical factors which should have pushed oil prices much higher.
We've had the continuation of the Russia-Ukraine conflict. We've had the conflict in the Middle East. We've had pretty good demand for oil from places like India and China, and yet oil has really come under pressure.
And my thinking for this particular surprise is what happens if oil just keeps going and drops to something like $40 a barrel? What does that say about the market's implicit assumption about the global economy or what would be driving that? So what would it say, Eric?
It says that global demand for oil is much softer than expected from key economies. It also probably says that global supply is much greater than expected. And I think in a world where we already have some concerns about an economic slowdown, oil at $40 a barrel would obviously be very consistent with the hard economic landing scenario that I think very few people are still expecting.
So let's say this hard economic landing scenario that very few people are expecting causes everybody to rush to the safe havens. What does that mean for gold? And I guess there's also an interplay there with the US dollar.
Well that's right. If we were to see a much more threatening economic slowdown and recessions in a number of parts of the world, you'd have to expect that central banks around the world are cutting interest rates very aggressively. Now typically gold prices do very, very well in that world of much lower interest rates, central banks easing monetary policy and people looking for the proverbial safe haven.
With gold, we took a slightly different approach than with oil because gold prices are at effectively their highs. Now what we said for a particular surprise that what happens if actually the Fed raises rates one more time? Not our base case scenario and I certainly would say not the base case scenario for most of the markets now, but let's say inflation were to come back and let's say the Fed felt compelled to raise rates one more time.
I think that would be disastrous for gold and some of the other safe havens. Another one that you pinpointed when it came to rate expectations was Japan and I was quite curious why this came up and what the narrative is here. The Bank of Japan was one of the early central banks to go down the path of extremely aggressive and experimental monetary policy.
Over the last couple of years, we have argued that they have kept that ultra-loose monetary policy in place for longer than was appropriate and we and in fact the entire marketplace have been trying to anticipate when the Bank of Japan would abandon that policy. Now what they've done is a little bit of a half step. They've started to dismantle one of the tenants of that policy which was yield curve control, but it's been very incremental and our surprise was what if the Bank of Japan says, okay, actually we really need to move past this.
We need to dismantle yield curve control. We need to start thinking about raising interest rates again and in that scenario, the Japanese Yen in our opinion would strengthen significantly. Now again historically, it's important to highlight that in 2023, the Yen weakened dramatically against the dollar.
It was the worst performing G10 currency, but if we were to see this paramount shift in the Bank of Japan's policies, I think you would unwind that Yen weakness very, very quickly and certainly something I don't think the market is positioned or prepared for. Let's talk about equity markets. Back to these recessionary fears.
So if some of that thinking comes to fruition, we may see some of the biggest guns in the S&P 500 fail to fire and that could be in the form of a string of profit warnings. So not a zero chance of this. Well the equity markets as a risk indicator or as an indicator of investor sentiment and appetite have been really difficult to understand over the past year and I say that because certain parts of the equity markets, US technology for example, have done extremely well, but other parts of the market, some of the more domestically focused or what we call smaller cap companies have really struggled and so what we've tried to do with this surprise is imagine a world where we discover that the technology sector is not as invincible as perhaps people had assumed over the past year and that if we really do start to see consumer spending slow down, if we really do start to see business investments slow down and we see the unemployment rate going higher, the technology space may not be as bulletproof as we thought and the problem is the technology space or sector is now such a large part of many country indices and so if the technology sector specifically were to start to experience some of these profit warnings, I think that would bode very poorly for global equities in general and that's something that I think again the market is underpriced for.
I wonder if you're considering that sort of a black swan event, do you want to be in a very diversified position? You don't want to be overweight tech and I wonder whether that has actually been the appetite of the last decade? Well this diversification point I think is really fascinating Manisha because if we look back over the last 12 years, the S&P 500 has outperformed emerging market equities by about 150% so that's roughly 11-12% per year on average excluding dividends, so that's not a one time one year event so that is significant and what I wanted to think about is what's the scenario where that story starts to reverse?
Let's say we get a soft landing, let's say U.S. interest rates come down but it's not a recession, U.S. dollar comes down but it's not a recession and by the way emerging market economies start to do better and the ones that have been doing well start to be recognized for doing well and in that scenario I can imagine emerging market equities having an absolutely spectacular year. Now there's one missing ingredient which we haven't talked about yet which is China. Emerging market equity indices tend to have a very large weight in China and as we know China's equity markets have done very poorly over the last couple of years but if we were to see a more significant policy response from China to drive an economic recovery, I think that growth narrative for China, the spillover to emerging market equities combined with a softer dollar and softer U.S. rates, you have a very powerful combination and you might even be willing to call that a perfect storm.
Now is that a high probability event? Not necessarily but that's why it sort of falls in the category of our surprises which is a non-zero but perhaps interesting scenario. Actually China was going to be my next question and I wanted to dive a bit deeper into the idea of an aggressive stimulus which is what you talk about in the report.
This is the policy response that I think you were just referring to. What does that look like? It is no secret that sentiment globally towards onshore assets in China is really quite negative at the moment.
Now I do think that we've probably gotten to a point where sentiment is overdone on the downside but to see a reversal you need a catalyst and I started thinking about what those catalysts might look like. So far China's policy response has been quite measured. It's been a combination of liquidity measures and fiscal stimulus measures but I wanted to think about a scenario where they got much more aggressive.
They really made a big push to stimulating hiring in the private sector, a big push towards stimulating investment and ultimately a big push towards stimulating consumer spending and if you were to see that sort of a big bang stimulus announcement, I think that would be very good for sentiment towards China and would be very positive for the currency. Okay. Let's talk about emerging markets.
You're talking about the possibility of emerging markets showing the biggest growth area of the decade so far. So what's that about? It's very tempting to get caught up in the global numbers, right?
We talk about global GDP or global trade and it's been our contention over the last year that focusing so much on these global numbers is in some ways quite misleading and look it's hard to say for example that you should be extremely optimistic when global growth is 2.9 or 3%. That is certainly a soft economic environment but unfortunately what happens in those soft economic environments is that the good growth stories are either ignored or underappreciated and if I think about 2024, we have some regions of the world that I would expect to do very very well. Think about Indonesia growing 5% plus.
We think about India growing 6% or even above. We think about some of the economies in the GCC growing at perhaps 4% or even better and so when you think about some of the major economies or regions of the world doing well, they often are not priced appropriately because of the overwhelming focus on the fact that global GDP is maybe 3% and so I think we live in a world where the gap between the haves and the have-nots getting wider and unfortunately the list of the have-nots is getting longer and that's an unfortunate aspect of the global economy but what I think it also does is it presents opportunities to really look deep at some of those economies and regions that are still performing well and I think that's perhaps mispriced or underappreciated in today's marketplace. You mentioned India, Taiwan, Korea.
These all have large market cap representation and you've talked about delivering returns in excess of 15% in 2024. That's a really interesting possible scenario. Well I think it's interesting for a few reasons.
Number one, I think it's interesting because I don't hear many people talking about it and number two, we have a potential turn in the technology trade cycle. There is some preliminary evidence that the tech space in Korea is starting to do better. There is some preliminary evidence that economic growth in India is continuing to look I think very robust and so considering that people have been very downbeat on Asia really for the last two or three years, it strikes me that may be a big potential surprise scenario for the years that Asia starts to recover some of that shine that it has had previously.
I want to talk about politics. There's just so much talk around the upcoming US election. You have a very interesting scenario.
Biden resigns and Trump wins the election. What made you come up with this scenario? I'm fascinated by the world of politics especially as we know politics intersects with financial markets and economies and I was looking at the US election and it seems fairly clear unless something really significant changes that we will see another election involving President Biden and former President Trump and so I don't think that scenario surprises anyone and then if we start to look at the polls, yet again the polls seem fairly close.
So Trump winning I don't think would count as a surprise but so I started thinking about other scenarios in the run-up to the election because I do think there is quite a bit of potential anxiety and uncertainty about this six-month run-up into the election and there's a couple of examples. There's been quite a bit of discussion even within the Democratic Party about alternative candidates perhaps not this time around but maybe in four years time and so there's a scenario that I can imagine where maybe they identify somebody who's super compelling and Joe Biden says you know what actually that candidate is the best chance for defeating Donald Trump and I'm going to defer to that individual. Now let's be very clear.
I'm not assigning a super large probability to this. The US politics has become so unpredictable that I think we do ourselves a disservice if we don't start thinking about some of these off-the-wall scenarios and this would certainly be one of them. Now my final question is around positives and negatives.
From your list of eight scenarios, which of these will have the most positive outcomes and which of them would have the most negatives? I think if the market were forced to reprice and forced to deal with the Fed actually raising rates again, I think that would be highly disruptive to financial markets and economic sentiment and it might even create one of those crazy scenarios where the Fed hikes one more time and then because of the damage that that does to sentiment, they're actually cutting relatively quickly thereafter to try and stabilize things. I do think a final rate hike or even hikes from the Fed is just something that people would view as being damaging to both the financial system and markets and to the economy.
The other negative and we have to really come back to this is oil at $40, I think would be viewed as symptomatic of a really dire economic situation. I suspect some catalyst would have to occur before oil went to $40. If oil is at $40, we will already know that there's a problem and oil going to $40 would just beat the market manifestation of that.
The positive event that I think would be the biggest surprise to people is this China stimulus story. I mean as I said, consensus is really downbeat and I think a big stimulus program from China would really catch the markets off guard in a very positive way and would bring a lot of capital back to Asia more broadly and emerging markets. Yeah, and big ripple effects I would imagine.
Eric, it's time to wrap up. Are there any last thoughts that you want to leave us with? I suppose that the final thought that I would share is that if we look at the various measures of risk that are available to us, whether it's the famous VIX index for the S&P 500, whether it's credit spreads or any other measure you want to use, they are extremely low and I believe that the way the markets are pricing tail events on both sides of the distribution is too low.
I think we live in a world of significant economic, political, geopolitical uncertainty and I don't think markets are priced appropriately for that potential or those potential disruptions and so that would be my final conclusion statement. Yeah, that is a good one. Eric, it's always a pleasure.
Thank you also so much to our audience. It's always great to have you with us. Please do share your feedback for future podcasts.