Why 13? Well, it’s going to be 2013, and 13 is unlucky. Still, as Deutsche points out, surprises happen more often than you would think. The financial crisis of 2008 taught us that, but the notion that markets are well-behaved and extreme outcomes rare is hard for investors to shrug off.
| Outliers happen more often than we expect |
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| Source: Deutsche Bank |
So rather than just a bit of fun, it is a somewhat serious exercise. Deutsche says these are not simply the commonly cited risks to views, but events and occurrences that would genuinely surprise market participants. Of course, these do not represent Deutsche’s baseline views, rather the outliers that are in the tails of expectation distributions.
“Our ability to predict outliers, by very definition, is limited, yet we hope the approach of assuming extreme events will be more common than we might think should provide the right mindset as we enter 2013,” the bank says.
So here goes:
1. US Federal Reserve finances the purchases of equities
The Fed has consistently taken a more aggressive approach to easing since the 2008 crisis. Indeed, the most recent Federal Open Market Committee meeting introduced QE4 and quantitative thresholds for future policy – steps that were more than many had expected. The question is, what could the Fed do next? Finance the purchase of equities could be the answer.
Should this happen, growth and risk-sensitive currencies, such as EM FX, dollar bloc and SEK, should perform well.
2. Greece discovers gas reserves valued more than total debt
Greece has sizeable undersea terrain in the Mediterranean, and several Mediterranean countries have already discovered and are exploiting undersea natural resources, most notably the Levantine gas field between Israel and Cyprus.
Should this happen, EUR should perform well.
3. Sweden, Turkey and Brazil work together to bring peace to the Middle East
In September, at the 67th UN General Assembly meetings in New York, Sweden, Brazil and Turkey launched a new initiative called the Three Soft Powers from Three Continents.
Should this happen, ILS and EGP should benefit, and oil exporters CAD and RUB suffer at the expense of importer currencies like INR and TRY.
4. UK coalition government breaks up – election called
It is not widely anticipated by political analysts that the coalition government will hold until the end of the parliament term in 2015. Both the Liberal Democrat and Conservative parties will likely wish to have some time before the next election to distance themselves from the policies of their partners in the eyes of the electorate. This split could potentially occur as early as next year.
Should this happen, GBP should depreciate.
5. A 2013 race to negative deposit rates and every leading stock market in the world is up
It started in Denmark and Switzerland, with Japan following, and to avoid excessive currency appreciation, EUR and then the USD could follow suit with negative rates.
Should this happen, carry currencies should outperform.
6. North Korea opening/détente
Unconfirmed reports this year suggested new North Korean leader Kim Jong-un planned to push ahead with reforms, enabling capitalistic agricultural and industry reform like China did in the 1970s and 1980s.
Should this happen, KRW should appreciate.
7. Iran turns less hawkish or more volatile
The Iranian presidential election is scheduled to take place on June 14 to choose a successor to Mahmoud Ahmadinejad. While the list of candidates is pre-screened by the Iranian Council and the selection process is being tightened via changes to the electoral law, the election outcome still has the potential to surprise.
Should this happen, ILS would likely be most sensitive, along with oil betas – CAD and RUB in particular.
8. Breakdown of FX/equity correlation
The spike in correlation between G10 FX and equities beginning in 2008 and lasting through the present is unprecedented in the free-float era. Next year might finally see the breakdown in this correlation.
Should this happen, FX should become more diversified.
9. South China Sea territorial tensions escalate
An assertive China, the US foreign policy pivot toward Asia, an ocean bed of potentially vast mineral reserves surrounded by fast-growing resource-hungry nations, disputed maritime boundaries and fishing boats with tendencies to stray all make for a combustible situation in the South China Sea.
Should this happen, all Asian FX, including JPY, should suffer.
10. Europe gets powered by solar
In theory, an area of the Saharan desert the size of Wales could harness enough solar energy to power the whole of Europe.
Should this happen, EUR should benefit.
11. Climate change risks begin to get priced
In March, the Intergovernmental Panel on Climate Change published a report warning that global warming is already resulting in such extreme weather that governments should prepare themselves for a higher incidence of natural disasters. This admonition was brought home recently by the devastation caused on the US East Coast by Hurricane Sandy. Accelerating climate change has a number of implications for financial markets and FX.
Should this happen, FX volatility should rise.
12. EM bond-bubble bursts
The past few years have seen non-resident investors build up their positions in EM local debt markets to new record levels, driven by a broader global search for yield, monetary policy easing across leading emerging markets and the healthy state of EM fiscal balance sheets. With few exceptions, markets expect this trend to carry over into the new year. However, with output gaps typically limited, real rates at cyclical lows and global liquidity abundant, EM economies will be sensitive to higher inflation, which could undermine the attractiveness of EM debt given that it is already unattractive versus inflation expectations.
Should this happen, EM FX should suffer and FX vol should rise.
13. Malaysia government loses election
In Malaysia, elections must be called within the first half of 2013. Barisan Nasional, the ruling coalition, in 2008 lost its super-majority (two-thirds) for the first time in Malaysia's modern history, and there has been a growing popular movement for electoral reform since. An upset by the opposition – although very unlikely by all public indications – could have a substantial impact on economic policy.
Should this happen, MYR should depreciate.