- We define grey swan events as global risks that many have highlighted, but in the end have turned out to materialise in a much more extreme fashion than expected.
- Our listicle outlines what we think will be the biggest global market impactors for 2019.
Black swan events (as opposed to grey swan events) are events that are out of the realms of possibilities at least as envisaged by market participants.
So what grey swans are possible in 2019? This year we have tried to equal out the positive grey swans against the negative ones. None of these are our base case, and instead are more an exercise in forcing us to think outside our usual base scenario-risk modes of thinking.
We’ve identified nine in total:
1: End of populism
The rise of populism in many ways can be traced back to China. Its economic rise, especially since the financial crisis, has brought unease to many developed countries. Globalisation rather than just producing cheap goods for rich countries, has now allowed countries such as China to take middle-class jobs from developed countries. Moreover, unlike the previous ideological rival the USSR, China’s rise has shown that liberal democracy is not the natural end-stage of political-economic evolution.
2: Oil price plunges to $20/bbl
Oil prices fell to a 13-year low of around $26/bbl on 20 January 2016. Six months before that, prices had been $60/bbl. A year earlier, in June 2014, they had been $100/bbl. In other words oil prices have a recent history of moving from boom to bust and in ways that oil analysts have not expected. Could a similar slump in oil prices unfold in 2019? While it admittedly carries a low probability, we think the scenario is certainly plausible.
3: The big market quake
It’s easy to paint a picture of a market crisis in 2019, market liquidity conditions worsening with lingering effects of Fed hikes and continued balance reduction, the ECB and BOJ scaling back their QE measures and China continuing its deleveraging policies. Meanwhile, the US joins slowing Europe and China as US fiscal stimulus effects fade. Then there were the mini-quakes in 2018 from the VIX sell-off, the EM FX collapse, trade wars, the Italian blow-out, Brexit and US stock correction. These could be precursors for the big one.
4: Italian Renaissance
Italian government net debt is over 100% of its GDP, the country has a populist government that is at logger-heads with the EU over fiscal slippage and growth has been weak. There’s not much to like about Italy fixed income. But while it is tempting to extrapolate 2018’s bearish trend, the market may suddenly realise how overly pessimistic it has become.
5: EM deflation
There are glaring exceptions such as Argentina and Turkey, but generally CPI inflation in 2018 has fallen to historical lows in large EM economies such as Brazil (3.6% y-o-y), India (4.3%), Indonesia (3.2%), Russia (2.6%) and South Africa (4.6%). If we extend the period back to 2017-18, these five EMs have still averaged low inflation. It’s unusual for so many large EMs to have a lengthy period of low inflation, considering several have had a chequered past with bouts of high or hyperinflation, and it suggests something structural could be going on. Large EM economies experiencing deflation in the next few years may have sounded bananas five years ago, but now it seems plausible.
6: CNY comeback
Bloomberg consensus forecasts RMB to depreciate in H1 2019 with USD/CNY just under the 7-figure. Our current baseline is a break of 7.0 in Q2 2019. But the grey swan is if the broad market is wrong and RMB appreciates rapidly against USD. Even though we believe this as an unlikely scenario – especially with China growth set to slow significantly from around March to until end-Q2, there is still a possibility that several factors align and surprise the market.
7: Global growth takes off
In our base case Nomura’s economics team expects the world economy to slow in 2019 and to potentially disappoint consensus expectations. That’s driven by factors such as less accommodative fiscal policy, more restrictive monetary and financial market conditions, a slowing Chinese economy, together with uncertainties about the impact from trade wars, Brexit and Italian politics.
8: Deflating euro area
Low inflation has been a prominent feature of the post-GFC landscape. Our measures of the output gap in developed economies are now firmly in positive territory. But inflation is much lower than it has normally been at this stage in the cycle. This is particularly apparent in the euro area, where core inflation tracks around 1%.
Subdued price pressures could be one reason for being optimistic about a further prolonging of this business cycle. Central bankers are less likely to tighten policy and kill growth; indeed, monetary policy remains exceptionally loose. Moreover, low inflation means stronger real wage growth for any given nominal wage rate. But there is another side to the low inflation coin. Low inflation rates at this advanced stage of the cycle mean that when growth does roll over, deflation risks increase far quicker than they would normally.
9: Inflation sonic boom
Deflation, demographics, and debt have been the three infamous D’s haunting markets and central banks for the better part of a decade. Although inflation has been fleeting and sporadic, what if it has just been pent up and is waiting to be unleashed? The US economy could be one of the first to confront higher inflation at full employment.
Although our base case for the US includes a mild retreat on the inflation front, it could already be more than priced in given the fourth quarter collapse in inflation expectations. Even if inflation is lackluster in Q1 2019, there is a risk that inflation perks up later in the year.
Read the full report on the 9 Grey Swans for 2019.
Head of Fixed Income Research, EMEA
Macro Strategy Research
FX Strategist, EMEA