FXStreet (Delhi) – Research Team at HSBC, suggests that while a surge in EM capital inflows and a pick-up in US capex present upside risks to global markets, most of our risks for 2016 are skewed to the downside which includes policy error by the Fed, the UK voting to leave the EU and a rise in Chinese corporate defaults.
Key Quotes
“We would expect a Fed policy error to have a bigger negative impact than policy paralysis. Markets are currently pricing in a gradual Fed tightening cycle under the premise of continued modest growth. If the Fed was viewed to be committing a policy error though by tightening too quickly, asset prices could fall materially.”
“Global trade agreements such as the Trans Pacific Partnership (TPP) or the Transatlantic Trade and Investment Partnership (TTIP) and technological improvements should add to global growth beyond next year. It is rare that a growth positive shock surprises markets.”
“Other longer-term risks lurk on the horizon, such as climate change, antibiotic resistance, and pressure on welfare systems as working populations shrink.”
“If the UK votes to leave the European Union, it could adversely affect the European political landscape more broadly. Brexit would imply that EU membership is not a one way street, raising uncertainty about the other parts of the union. As such, periphery risks could resurface. Similarly, a US recession or Fed policy error could have a knock-on effect on liquidity, serving to worsen an already precarious situation.”
“We don’t want to cry wolf about any of these risks. But in a world that remains highly leveraged and with limited policy ammunition to offset any new downturn, markets will be sensitive to any shift in consensus. The global economy and markets are more exposed to downside risks today than they would have been if the expansion had been more robust, or we were earlier in the global business cycle.”
(Market News Provided by FXstreet)