Market Extra: S&P 500 to crash 25% — and 9 other ‘outrageous’ analyst predictions for 2018

How does a 25% flash crash in the S&P 500 sound? Or bitcoin peaking at $60,000 before sinking to $1,000? Or maybe even the U.S. Treasury sidelining the Fed and enacting a yield cap?

Sound outrageous? Well, while most analysts focus on what they view as relatively high-probability developments, Saxo Bank annually lays out 10 unlikely events that could nevertheless rattle investors in 2018 if they were to happen.

Of course, they aren’t Saxo Bank’s main calls for 2018.

The Copenhagen-based bank has made a tradition out of publishing outlandish outlooks each year. Head of FX strategy John Hardy, who led the project this year, pointed out that this season’s predictions reflect the lurking risk that a number of asset bubbles built up during 2017 could burst in the year ahead.

“In 2018 we see the pendulum swinging back in favor of pronounced volatility risks as the irony of long periods of quiet and complacency in asset markets is that they sow the seeds for future volatility as investors underestimate tail risks and overleverage their bets on a continuation of the cycle,” he said.

“It’s safe to say that if any of our predictions see the light of day in 2018, the world will feel like a new place this time next year,” he added.

So will any of the outrageous predictions come true? Wait and see…

1. U.S. yields spike and Treasury enacts 2.5% yield cap

In this scenario, the Federal Reserve’s 66 years of independence ends after a massive bond market meltdown that sends bond yields to the sky. That prompts the Treasury to take on emergency powers, seizing the reins as it did after World War II and enacting a 2.5% yield cap on long bonds. That helps the Trump administration save face heading into the 2018 mid-term election.

“The hapless Fed will be scapegoated by politicians for the economy’s weak performance, a bond market in vicious turmoil, and the aggravation of already worsening inequality brought on by years of post-global financial crisis quantitative easing,” Saxo Bank’s chief economist Steen Jakobsen said.

2. Yen plunges and forces BOJ to abandon yield-curve control

The Bank of Japan last year introduced “yield-curve control” to keep 10-year government bond yields at zero. However, as rising inflation pushes interest rates up sharply globally— led by the U.S. — in 2018, the central bank will struggle to defend the “peg” and pressure will be transferred to the yen USDJPY, +0.28%  instead.

In this scenario, the dollar jumps to ¥150, forcing the BOJ to capitulate on its monetary policy. The yen quickly bounces back afterwards, leaving the dollar to fetch only ¥100.

3. China rolls out yuan-denominated oil futures and yuan jumps 10%

China is already the world’s largest oil importer and many oil producers are happy to deal in yuan. That leads the way for the Shanghai International Energy Exchange in 2018 to launch an oil contract denominated in Chinese yuan, “a move with tremendous geopolitical and financial consequences.”

Read: Are we entering the age of the ‘petro-yuan’?

“This is both because China has effectively allayed fears that it will devalue its currency and to thumb their noses at the U.S. due to fraught relations with the declining superpower,” said Ole Hansen, head of commodity strategy at Saxo Bank.

In this scenario, the introduction of Chinese petro futures sends the yuan up more than 10% against the dollar, taking the dollar-yuan pair USDCNY, +0.0045%  below 6.0 for the first time ever. The dollar currently trades around 6.6 yuan.

4. S&P drops 25% in 1987-esque flash crash

After a year of historic low volatility, global assets have been driven to bubble levels, boosted by massive inflows into passive investment vehicles, smart beta funds, “risk parity” asset allocation funds, and highly risky short volatility strategies, according to Peter Garnry, Saxo’s head of equity strategy.

Around $800 billion sits in risk parity strategies and with low returns in the bond markets, these funds will have to increase leverage to meet volatility targets.

“In short, it’s a powder keg — any policy or shock could trigger a flash crash in multiple markets with risk parity funds acting as an amplifier as investors pile into cash,” Garnry said.

That means the S&P 500 index SPX, -0.01%  suffers a 25% flash crash of 1987 dimensions and a whole swathe of short volatility funds are wiped out.

5. 30-year yield surges above 5% as voters push left in mid-term election

Trump has dominated the U.S. political landscape, but don’t forget the Bernie Sanders revolution that was unfolding during the primaries. The left-wing push becomes even more evident in the 2018 mid-term election where disgruntled millennials hand the Democrats control of both houses of Congress.

“The Democrats pull the debate away from tax reform to spending stimulus for the masses. True populism means breaking out the checkbook for the 90%, and that means fiscal stimulus, deficits be damned. U.S. 30-year Treasury yields rip beyond 5%,” said Hardy.

6. Euro tanks to dollar-parity as EU power shifts to Eastern Europe

The Franco-German push for further EU integration faces a backlash, with leaders from central and Eastern Europe opposing the idea of creating a joint treasury and common defense budget. The new Austrian chancellor teams up with populist Hungary leader Viktor Orban and the so-called Visegrad Group — Czech Republic, Hungary, Poland and Slovakia — grouping together some of the EU’s most europhobic members.

Supported by Italy, once again run by colorful Silvio Berlusconi, the new alliance forms a blocking minority at the European Council, gravely upsetting financial markets. In this scenario, the euro EURUSD, -0.0085%  plunges to parity with the dollar, from around $1.18 where it currently trades.

7. Bitcoin spikes to $60,000, but then plummets to $1,000

The cryptocurrency continues to rise in early 2018, topping $60,000 after the introduction of bitcoin futures in December 2017 leads to a renewed inflow from investors otherwise uncomfortable trading on cryptocurrency exchanges.

However, Russia and China move quickly to sideline bitcoin, launching a crackdown on cryptocurrencies. That sparks a bitcoin crash, taking the asset all the way down to its fundamental “production cost” of $1,000.

8. South African rand soars 30% after “African Spring”

The ousting of Zimbabwe’s long-term president Robert Mugabe in 2017 leads to a wave of democratic transitions across the continent. This “African Spring” forces out South African President Jacob Zuma and pushes Congo’s Joseph Kabila to flee his country after unprecedented demonstrations.

New leaders are chosen and investors — faced with the prospects of lackluster returns elsewhere — start to pour money into the region.

South Africa stands out as the main winner and the rand USDZAR, +0.7269%  soars 30% against the dollar, euro and yen.

9. Tencent soars 100% and topples Apple as world’s largest company

Tencent shares 0700, +3.28%  are already up 93% in 2017 so far, but shares will double next year as well, according to this outrageous prediction.

As China opens up its capital markets, investments pour in from all over the globe and focus particularly lands on the country’s tech stocks. Tencent continues its explosive topline growth — it jumped 60% in the third quarter — and surprises the market in successfully monetizing Facebook-equivalent WeChat’s billion-plus active user base.

”Tencent shares advance another 100% despite the company’s already enormous size and in 2018 the firm steals the world market cap crown from Apple at well above $1 trillion,” said Garnry.

10. Women take record number of CEO jobs at Fortune 500 companies

Women break through the glass ceiling and more and more females get to lead the world’s biggest companies in 2018. The trigger will be 2017 #metoo campaign against sexual harassment that will leave ”the chauvinist old boys’ clubs … shaken to their core by shareholders” and lead to “enlightened self-reflective purges.”

That leaves room for more women to climb to the top in this scenario, with female CEOs at more than 60 Fortune 500 companies by the end of next year. In 2016 the number was 21, while it had risen to 32 in 2017.

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