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Strong stocks and rising bond yields are among the 10 potential surprises outlined by Credit Suisse’s global strategy team.
“For the last 30 years, at the beginning of each year we have looked at where the risks to our central scenarios lie,” analyst Andrew Garthwaite wrote in a note.
The scenarios are:
1. The S&P 500 (SP500) (NYSEARCA:SPY) rises to 4,500 against the central scenario of caution in equities
“Inflation falls in line with prices paid and the Fed begins to have renewed confidence in its inflation models, allowing it to pivot aggressively. Much more important, the fall in inflation must be associated with a larger fall in the wage growth.
2. Japan Yield Curve Control Ends in Q1 and BOJ Rises in 2023 vs. Baseline YCC Continues for Now
- “The logistical problems of yield curve control are only increasing (BoJ owns nearly 60% of the 7-10 year JGB market)… It could also be politically prudent given the weak yen (FXY) the policy is now unpopular (as it has caused cost inflation) and little benefit from here, in our view (the yen is already weak enough to limit offshoring).”
3. Yen vs. US dollar (DXY) (UUP) rises to 100, leading to Japan outperformance vs. inside view of yen appreciation to 120
“Between March 1995 and August 1998, the yen weakened from yen/$80 to yen/$145. As the carry trade unraveled with the liquidity collapse caused by LTCM, the yen rallied during the year yen/$145 to yen/$100 (i.e. c30%) This time, the carry trade has been active for much longer and therefore the reversal rally should be larger in turn than that of 1998”.
4. 10-year Treasury yield (US10Y) (TBT) (TLT) rises to 5% vs. internal view of 3.3%
- “Bond yields could end up closer to 5%, due to: Bottom-up push for yields from Japan and Europe… US long-term inflation breakeven points are too low…Central banks raise their inflation targets” and bonds supply.
5. China has a hard-landing vision in front of the house of a GDP growth of 5.1%
- “The catalysts for a possible China bankruptcy: Chinese house prices fall 20%… China goes into deflation, raising real rates… As China opens up, it goes into a current account deficit …Limited fiscal capacity to respond, with the realization that the fiscal position is much worse than it appears and higher real rates.”
6. US house prices fall more than 20% against the baseline scenario of a modest decline
- “In very simple terms, real mortgage rates imply a 20% drop in home starts, which also implies a 20% drop in home prices. As highlighted in our fourth surprise, there is a risk of that the yields of the bonds can increase to 5%”.
7. Italy has a financing crisis vs. base-case spreads do not widen significantly
- “Essentially, we could have a crisis if EU rates rise more than expected and, at the same time, Italy backtracks on reforms.”
8. The war in Ukraine ends in front of center stage, the war continues until 2023
- “At some point, Putin may realize that with Western military aid escalating to offensive weapons, this is a war he can’t win. , at the height of the advancement of him. Over time, Western training and weaponry is likely to only increase the combat capability of the Ukrainian army.”
9. Gold (XAU:USD) (GLD) price rises to $2,500/oz vs. insider view that gold falls to $1,850
- “Central banks are desperate to find an alternative reserve currency. If all central banks with less than 10% gold reserves were to go to 10% (and some central banks have almost 80% gold reserves), then the demand for gold would increase 1.6 X.”
10. Oil prices (CL1:COM) (CO1:COM) (USO) (BNO) rise to $120/barrel against house sights of $85 for 2023 and $80 for 2024
- “How could oil get to $120?…China’s opening adds between c1 and 1.5mbd to demand…Risk of bigger cuts materializing…Russian sanctions on oil products of oil… Shale response remains muted… OPEC+ chooses to push oil price up… End of depletion of strategic reserves… Speculators remain short”.
See why Wells Fargo says stocks need a breather.
