The Fiscal Cliff May Have Been Averted But Other Cataclysmic Events Could Lie in Wait

Terry Flanagan

With market sentiment seemingly shifting almost on a daily basis as politicians in the U.S. ‘fiscal cliff’ drama played a game of political dare over the festive period, and with a macroeconomic picture that is still far from certain to predict, it perhaps makes sense for investors to be aware of what could go wrong if certain extreme market and political events—albeit unlikely—play out.

“Before trading or investing, investors must know the worst-case scenario—capital preservation is a must and portfolios need to be able to weather a perfect storm, or for that matter any storm,” said Steen Jakobsen, chief economist at Saxo Bank, a Danish online trading platform.

After the stock market rally of last summer and with a deal finally reached, for now, on the U.S. ‘fiscal cliff’ crisis, which has seen shares gain in early New Year trading on both sides of the Atlantic, it seems that investor confidence may finally be turning more bullish.

“It is clear that rising and falling markets have a corresponding effect on and a very close correlation to investor sentiment,” said Angus Campbell, head of market analysis at Capital Spreads, a U.K.-based financial spread betting and contract for difference provider.

“During bull markets we all feel better about the economic prospects going forward, but the exact opposite when markets are declining.”

But with the financial crisis of 2007-08 still fresh in investors’ minds, and issues stemming from it still somewhat unresolved, it could pay to remain bearish as markets “can turn on a sixpence”, according to Campbell, “and if the markets start to head lower again we can expect to see confidence take a dive too”.

With this in mind, Saxo Bank recently released its annual batch of 10 outrageous predictions for 2013.

Among these is that Germany will move toward accepting the mutualization of euro debt, which combined with other strains could cause the DAX to plunge by about a third from near multi-year highs to 5,000. Another is that gold will fall by around $500 to $1,200 per ounce on faster U.S. growth and a stronger U.S. dollar and despite the overhang of the Fed’s easy monetary policy.

Other events Saxo Bank believes would have a significant impact should they come to pass include Spanish interest rates rising to 10% despite the European Central Bank’s outright monetary transaction mechanism as Greece exits the euro and social tensions rise, and the un-pegging of the Hong Kong dollar from the U.S. dollar and its re-pegging to the Chinese renminbi as China attempts to take more control of its economic destiny away from the U.S. and its central bank’s policies.

“This year’s outrageous predictions are once again a selection of mainly negative events, any of which can change the financial landscape and in some cases even the political status quo,” said Jakobsen at Saxo Bank.

“At the end of 2012, we have extremely low volatility in all asset classes due to the lack of real price discovery from heavy handed manipulation by central banks. In such an environment, almost any move outside of two standard deviations is becoming ‘outrageous’.”

The 10 predictions are obviously not Saxo Bank’s official forecasts for 2013.

“They could, however, prove far more relevant for investors because of the huge impact if any one of them sees the light of day in the New Year,” added Jakobsen.

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