Developed Countries

Every year we highlight five low-odds scenarios that would have a major impact on global financial markets if they happened. This year we contemplate a total reversal of Chinese policy, a US-Iran nuclear deal, a breakdown of NATO, US military action across the Americas, and an internationally coordinated FX intervention.

In most developed economies, rising inflation expectations will lift them further above the 2 percent target, limiting the scope for further interest rate cuts. But in Japan, rising inflation expectations will lift them up to the BoJ’s 2 percent target, removing the BoJ’s justification for its zero-interest rate policy. The normalisation of Japan’s monetary policy poses a big structural risk to stocks because Japan has been the main source of financial market liquidity, and thereby, of rising stock market valuations. From a timing perspective though, wait until the complexities of the price trends in USD/JPY and/or Nasdaq versus 30-year T-bond have collapsed. Plus: go tactically long copper.