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10 shocks in 2011: Surprises in the Year of the Rabbit
Event
􀂃 In this note we call upon our Economists and Commodity analysts from
around the globe to question conventional wisdom and consider events that
are not part of our base case assumptions, but if they did occur would have a
decisive impact on markets.
􀂃 While there are numerous interpretations for Chinese astrology (and we
cannot claim to be experts), we are led to believe that the year of the Yin
Metal Rabbit will be a more peaceful year after the turbulence of the year of
the Tiger. Those investors whose nerves have been frayed by market
volatility over the past few years may welcome this news!
􀂃 However, recent history suggests it pays to consider unexpected outcomes.
We present 10 possible scenarios for 2011:
1. 2010 was a topsy-turvy year for some currencies, realignment of
exchange rates globally from the status quo of the last few years would
be a surprise.
2. Recently we have seen substantial upgrades to US growth expectations,
but we think one potential surprise that could push growth higher is a
construction boom in the developed world.
3. Chinese growth is expected to be robust next year, but with that comes
the expectation of stronger inflation. If China's disinflationary supplyside
forces overwhelm current inflation, markets may have to
significantly change their expectations for policy and activity.
4. Emerging markets have been seen as stable relative to some developed
world markets in 2010, but destabilising overheating and debt default
in second tier emerging markets would leave a mark on the landscape.
5. Weather has played in huge role in the spike in agricultural commodity
prices, with a switch to El Niño weather conditions a clear divergence
from the current status quo.
6. Severe shortage of steelmaking raw materials, steel price returns to
US$1000/t.
7. Agreement on a global framework for carbon emission reductions
and a unified carbon trading scheme, would bring this issue back to
the forefront after little progress over the past few years.
8. 2011 could be the year that copper supply surprises by performing,
with the expectation of underperformance a key driver of the bullish
sentiment.
9. A continuation of Chinese power cuts would be an unexpected
hindrance on Chinese metal production in particular.
10. Aluminium and zinc could come unstuck if short term interest rates rise
faster than expected and financing deals unwind.
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