Assessing the risks of 2015

Morgan Stanley provides its list of top risks for 2015 today:

Risk #1: US Bond Yields Rise Sharply, Rapidly Reconnecting With Fundamentals. US bond yields have tracked Europe and Japan lower, but the strong US economy, diminishing spare capacity, Fed forward rate guidance and valuation all point to upside risk. Rising US yields would pressure Australian bonds and yield stocks.

Risk #2: The Impact of the Oil Price Collapse is Underestimated – energy consumers will enjoy a substantial “tax” cuts, worth up to 2.5% of GDP in the US, and a major positive for Developed Markets. On the other hand, lower prices are a major challenge for non-diversified producers like OPEC and Russia- financial and political risks will remain elevated.

Risk #3: The Reserve Bank Restarts an Easing Cycle: given below-trend growth, rising unemployment, low inflation and constrained policy, the onus for navigating the post-resources boom transition falls on the RBA. Signs of a moderation in housing may increase the RBA’s freedom to cut rates. Rate cuts would be a major market positive, and help Consumer Discretionary stocks.

Risk #4: The Eurozone Slips Into Deflation. The double-dip recession, high unemployment, and low starting point put theEurozone perilously close to deflation. A weaker Euro and aggressive ECB should help contain this risk. Abundant ECB liquidity should be positive for risk assets.

Risk #5: The Fed Jawbones and Then Lifts Rates Sooner Than Expected. The strong US economy and falling spare capacity may lead the Fed to act, should dovish market expectations persist. This would drive a market correction- but strong growth would then push the US market higher.

Risk #6: An Emerging Markets Crisis – a strong US Dollar and Fed tightening have historically been negative for EM. Consistent with this, fund outflows are currently occurring. That said, currencies, policy and rates have moved to pre-emptively adjust. India, Indonesia and Turkey appear less risky. On the other hand, Russia and Brazil remain vulnerable.

That’s a pretty bland list. The first is very unlikely given the combined deflations being triggered by oil. The second, third, fourth and sixth are already priced in. The fifth is very unlikely and given consensus still expects rate hikes at some point the real risk is them not coming at all.

Here’s my own list of top risks in no particular order:

  • the RBA cuts rates and Australian east coast houses takes another dramatic up-leg because APRA’s macroprudential isn’t tough enough;
  • China grows at 6%, iron ore falls to $40 and oil to $30 as the commodity deflation cycle rages;
  • a  systemic bank or hedge fund is dragged down by the commodities rout and counter-party risk soars, leading to QE4.
David Llewellyn-Smith
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      • Revelation 13:18

        The Mark of the Beast
        …17and he provides that no one will be able to buy or to sell, except the one who has the mark, either the name of the beast or the number of his name. 18 Here is wisdom. Let him who has understanding calculate the number of the beast, for the number is that of a man; and his number is six hundred and sixty-six

  1. Guys, I had a look at the Oil thingy on the weekend.
    Seems in the USA and Canada alone there is 9 trillion of loans been extended to the frackers and fracking associates, tar sands etc which will evaporate should the oil price stay under 60/bbl.
    Much opinion is that the prices will be kept at under what ever it takes to bankrupt not only the oilmen, but their financiers. Add to that mess British Gas their projects and who ever financed them.
    This is going to be some year.WW

  2. I’m also wondering whether this might end up being the trigger for the end of the USD as THE reserve currency. The problems may become large enough for a sufficient number of oil producers outside the US to say ‘nyet’ ! ??

    • Still chuckling about Risk 5.
      US 10-year bond is down 37% in last 12 months to 1.77%.
      Total US Treasury bearing debt now 2.4% including the unmarketable bonds.:
      US rates won’t go up in my lifetime.

      • Hilarious isn’t it.

        Sell side trying to pump the ‘booming economy’ story while still tying to balance the Fed’s complete recklessness in allowing ZIRP to continue.

        I don’t care if GDP stayed at 5% growth and SP500 EPS grew by 10% – if the Fed ‘normalised’ rates to something like a 4% 10YR – the SP500 would drop 30%+ and all hell would break loose.

        Not going to happen

        Janet is using the ‘wealth effect’

      • You must be nearly as old as me!!! When they have abused the privilege of being the reserve currency sufficiently IR’s will increase. The China Russian axis will be worth watching over the next few years.

      • flawse
        64 in a few months
        Guess you could add India to Russia and China.
        Also Germany because of geography and its dependence on Russian energy … also pissed off with US about repatriating gold.
        Germany not enamoured with Euroland.