Societe Generale’s latest update to its famous “black swans” chart is out.
“Black swan” events are those which are unlikely to occur but, should they come about, would cause chaos on global markets.
Europe’s stability has re-emerged as the major cause of concern as the Brexit referendum approaches. Soc Gen has placed a 40% probability – a very high number for the black swans schematic – on political or policy uncertainty in Europe unleashing financial market ructions.
Soc Gen explains:
Austria came all too close for comfort to electing a far-right president. The sigh of relief was palpable, but with a very busy political agenda lined up for the coming quarters, the risk of an event delivering an unexpected outcome remains high, be it the OMT judgement from the German Constitutional Court on 21 June, the UK Brexit referendum on 23 June, Spanish election on 26 June, Italian referendum in October and heading into 2017, elections in France, Germany, Netherlands and possibly Italy.
Whether ultimately good or bad news, any unexpected outcome is likely to deliver an uncertainty shock. The result would be a risk-off mood on markets and a short-term headwind to output until greater clarity returns. Such is the nature of policy uncertainty. Our baseline
assumes a drag of 0.5pp on output (accumulated since 2014) to remain over the coming years. That could more than double in the event of an unexpected outcome.
China also features, with Soc Gen seeing a 30% probability of a hard landing for the world’s second-largest economy. “The potential for policy errors in China is substantial, and all the more so since a new bubble appears to be building in the property market,” according to Soc Gen. “The authorities are clearly keen to start recognising and tackling the mountain of non-performing loans. The approach will be one of trial and error, with the downside risks implied in the name.”