Top 10 risks for markets according to HSBC analysts

Risks are on the rise in stock markets. The almost automatic risk-on, risk-off trade scenarios are no longer that reliable now that the Federal Reserve has stopped printing money.

The big shift away from central bank-induced trading is already on the way for investors, who increasingly have to go back to trading the fundamentals in a world where central banks have printed unprecedented amounts of money.

Risks Central Bank Assets

Risks are on the rise in the markets. Central banks almost out of ammo. Source: HSBC

HSBC analysts have put together a list of 10 risks to watch out for in these markets, with the caveat that it is very possible that none of the risks will see the light of day.

  1. Global recession. This means that markets return to the risk-on/risk-off trading paradigm and risky assets sell off, while yield curves flatten across the world. This would mean that the global economy falls back into recession at a time when central banks are almost out of monetary policy ammunition.
  2. Europe: weakness spreading. The analysts call this “fragile fringe, fragile core” and it means that the persistent weakness in periphery eurozone countries spreads to core ones, like Germany, which will eventually mean that the eurozone’s biggest economy will end up seeing fiscal stimulus in a more favourable light. For investors, this risk means that stock markets, credit default spreads for eurozone periphery countries and the euro sell off as worries about growth and a eurozone breakup return.
  3. Hard landing in China. Worries about this are already hammering commodities markets and countries that rely on commodity exports. For the HSBC analysts, a hard landing in China would mean that growth falls in the low single digits.
  4. Emerging markets reforms. This would not necessarily be a risk as such, as it would be a positive for markets in the end. It means policymakers in emerging markets embark on deep-seated reforms and would see equities and currencies taking off in Brazil, India, Indonesia, Mexico and Turkey.
  5. Premature tightening. If the Federal Reserve hikes interest rates too soon, growth could grind to a halt. If that happens, the Fed would change its stance and bring interest rates back to zero again and they stay there for a long time. Equities initially sell off, but then find a base on hopes for more quantitative easing.
  6. ECB disappoints. Markets seem to think that ECB full-blown quantitative easing – the central bank buying eurozone countries’ government bonds – is inevitable, especially after Mario Draghi’s news conference in December, when he made clear the central bank doesn’t need Germany’s consent to go ahead. If the ECB doesn’t go ahead with full-blown QE, European stocks could fall, spreads of periphery eurozone debt would widen and the euro, after weakening initially, would go up.
  7. New Japanese money-printing. The HSBC analysts say this is the risk of “Japanese helicopters” – new, experimental ways of throwing even more money at the economy. If that risk materialises, “hyperinflation awaits,” Japanese equities sell off after rallying initially, the yen falls against all currencies, and gold takes off.
  8. The strength of the US dollar. There have already been warnings that a too strong US dollar could spark a world crisis. If the US economy continues to grow much faster than the rest of the world, the dollar will keep appreciating, pushing the currencies of commodity exporters even lower. The Russian rouble (RUB), the South African rand (ZAR), the Mexican peso (MXN) and the Brazilian real (BRL) would take the worst hits.
  9. A spike in the price of oil. After the recent weakness, if production outside the OPEC countries is reduced, the price of oil could rise sharply. This would mean the currencies of oil-exporting countries rebound, while the battered shares of oil companies and oil-servicing firms jump. US high-yield debt, a lot of it consisting of energy companies’ bonds, would rebound as well, in this scenario.
  10. Liquidity risk, or liquidity “black holes.” This is a scenario under which market makers try to avoid inventory risk during periods when there is a mismatch between supply and demand, and act more like brokers. This would lead to periods when market liquidity vanishes, heightening volatility. Investors can protect from this by “owning volatility across all asset classes.”

@AntoniaOprita

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