MORGAN STANLEY PRESENTS: 17 Big Surprises That Could Rock Markets In 2013

day after tomorrow

Morgan Stanley’s Global Economics team led by Joachim Fels has released its list of Macro Surprises for 2013.”We pick up a tradition introduced nearly three decades ago at Morgan Stanley by our legendary former US strategist Byron Wien,” wrote Fels.

Earlier, we scored Wien’s surprises, which he now predicts for his new employer Blackstone.

“These surprises do NOT represent our base case,” emphasises Fels. “Rather, the events we describe would come as a surprise to us as well. However, we do believe that they depict plausible possible outcomes that would represent a meaningful surprise to the prevailing consensus.”

Their list of surprises for the year ahead spans the globe and runs the gamut of potential monetary, fiscal, and geopolitical scenarios.

Just When You Thought it Was Dead, Inflation Returns

Inflation could be triggered by a combination of another drought which limits agricultural production, stronger-than-expected recoveries from world's economic powerhouses (China and the U.S.), and ballooning central bank balance sheets.

Source: Morgan Stanley

Debt Cancellation

The U.S., Japan, and U.K. announce that all debt resulting from their QE purchases is cancelled, which would assuage the fears of ratings agencies but anger bondholders.

Source: Morgan Stanley

US Over the Cliff and Likes it

Chief U.S. Economist Vincent Reinhart predicts a fiscal cliff deal gets pushed into 2013, but an ultimate compromise reinvigorates confidence. Business investment jumps and the job market improves.

Source: Morgan Stanley

US Housing Stalls Out

A return to credit tightening could bar first-time homebuyers from the market and knock the U.S. housing recovery off track.

Source: Morgan Stanley

BoJ Leads World in Adopting Rule-Based Monetary Policy, but Exit from Deflation Lags

The Bank of Japan switches to using core rather than headline inflation (removes food and energy) and takes aggressive action to target an increase in price levels, though deflation occurs in 2013.

Source: Morgan Stanley

BoJ First to Buy Euro Area Bonds, ECB Left Watching and Waiting

In conjunction with its dovish outlook, the BoJ will buy euro bonds in an attempt to devalue the yen against the euro until it 'effectively becomes a lender of last resort for the euro area.'

Source: Morgan Stanley

Italian Politics Revives the Crisis Cycle and Triggers OMT

Expected anti-austerity campaigns during the election season could cause concern that Italy is thinking about leaving the euro. The convertibility risk returns and Italy triggers the OMT, causing the ECB to directly purchase Italian bonds.

Source: Morgan Stanley

*The crisis or CRIC cycle is characterised by crisis, response, improvement, and complacency.

From 'Grexit' to 'Brixit'

Greece remains entrenched in the E.U. while polls in early 2013 suggest that the U.K.'s exit from the E.U. is more likely than the indebted Mediterranean nation.

Source: Morgan Stanley

The UK Formally Gives Up the Fight Against Inflation

Pragmatism and political pressure will cause the BoE to abandon its 2 per cent inflation target, embracing a little more inflation to help the economy and keep interest rates low.

Source: Morgan Stanley

Recession Returns to Australia

Experts like Dylan Grice have made this call before. The argument can be made that this is long overdue -- Australia hasn't had a recession in 21 years.

Source: Morgan Stanley, Business Insider

Not the Right Green Shoots in Emerging Markets

EM continue path of export and foreign investment driven growth, failing to put in place structural reforms to ensure sustainable growth for years to come.

Source: Morgan Stanley

China's Shocking Tightening

Heavy-handed restrictions on lending could trigger a liquidity trap and credit defaults that cripples China, and in turn, the global economic recovery.

Source: Morgan Stanley

The Asia Ex-Japan Productivity Booster

With the exception of Japan, policy reforms throughout Asia will markedly increase productivity in the region, which will ultimately manifest itself in the form of higher corporate profits.

Source: Morgan Stanley

Mexico's Moment Arrives in its Long-Troubled Oil and Gas Industry

New leadership will implement policy changes which spur O&G production and use the revenues on social programs. The Mexican peso and foreign direct investment surge.

Source: Morgan Stanley

Brazilian Policy Shifts from Stimulating Demand to Boosting Supply, with Ambitious Infrastructure Programme

Brazil's decrepit infrastructure receives much-needed upgrades, which leads to inflows of foreign investment.

Source: Morgan Stanley

Turkey Goes Boringly Orthodox in Rates

The nation's central bank chooses to remove the unconventional tools from its array of monetary policy options but is unable to improve the country's economic outlook.

Source: Morgan Stanley

Back in the USSR

Led by Ukraine, Putin is able to re-integrate former Soviet satellite states with Russia, which leads to higher rates of economic growth throughout Eurasia.

Source: Morgan Stanley

Check out this epic presentation from SocGen's Kit Juckes on the crisis ahead

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