Following a brutal 2018, Nomura released their annual list of “Gray Swans” for the upcoming year this week.
If you’re not familiar, a Gray Swan—cousin to Black Swan events—is an event that can be anticipated to a degree. Considered possible but not certain, a Gray Swan event could have a massive impact on the market if it does happen.
This year, Nomura opted to include both negative and positive risks to cap off a difficult year. “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,” the team said.
Here’s the list:
- The end of populism
- Oil price plunges below $20 per barrel
- The ‘big market quake’
- Italian debt recovers
- Emerging Market deflation
- The Chinese renminbi recovers
- Global growth takes off
- Euro area deflation
- An inflation ‘sonic boom’
“So collapsing stock prices, a contagious sovereign crisis in Europe and Chinese defaults would be the obvious manifestation of a market quake,” the strategists wrote.
The mini market quakes thus far in 2018—trade war fears, Brexit, collapse in emerging market currencies, the U.S. stock market correction—could be leading to a big one next year.
The strategists said that there are three possible market quakes: a collapse in stock prices, a contagious sovereign crisis in Europe, and a Chinese default. They also noted U.S. stock valuations, Italian sovereign risk, and China’s mountain of private debt as possible catalysts.
“In such an environment, cash would likely be king, risk markets would underperform and safe-haven currencies such as the yen would do well,” they wrote.
“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 European Central Bank and Bank of Japan scaling back their quantitative easing measures and China continuing its deleveraging policies,” the Nomura strategists added.
As for the end of populism, the strategists say it’s already starting.
“Already we are seeing signs of this. The Republicans have lost control of the House in the U.S. midterms, and stock market weakness appears to have influenced President Trump’s trade policy to become more conciliatory,” they said.
And as for oil falling to $20 per barrel, Nomura says there’s a low probability due to the current supply glut however, they noted that it is “plausible” that oil prices could drop this low in 2019. Brent Crude closed at $60.37 on Wednesday.
Nomura noted that oil prices tend to move from boom to bust in ways that oil analysts don’t expect, pointing to when prices fell to a 13-year low of $26 per barrel in January 2016 down from $60 per barrel in June of 2015, and $100 per barrel the year before that.
“Currently, there is arguably a big glut in the oil market, partly thanks to rising oil production in the U.S. Less production restraint from Iran of late, combined with lingering tensions between OPEC and Russia supply responses could leave that oil glut larger for longer in the period ahead,” the Nomura strategists wrote.