SocGen's 6 Huge Macro Themes For 2011


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Societe Generale see 2011 full of risks, but mainly from 6 sources. The concern is that anyone of these issues could derail the global rally, and turn the equity boom around.Europe continues to dominate, with both political and economic concerns threatening developed markets. The U.S. too is of concern, as it may become the target of bond vigilantes. And China, unable to tame inflation, could be forced to land hard, and destabilize the global economy.

Theme: European leaders will need to form a fiscal union to deal with the deluge of new sovereign and bank funding in 2011. But Germany continues to focus on further austerity as the solution to the crisis. The result will be further political uncertainty across the eurozone, as more strikes and protests occur.

Potential outcomes: European leaders will either muddle through the year, eventually arriving at the solution of a tighter fiscal union or they will tighten the union ahead of schedule, with measures including e-bonds.

Source: Societe Generale

#2 Will European voters derail the currency union's pursuit of stability?

Theme: Elections in 2011 may be limited to Greece, Cyprus, Finland, and Ireland, but there still remains a political threat to stability. In Ireland, the new post election government may alter the current bailout agreement, or attempt to put more pressure on the bailed-out banks bondholders, causing funding problems for the fringe.

Potential outcomes: Extremists could rise, but European officials may also move faster to deal with the banking and sovereign debt crises.

Source: Societe Generale

#3 How long can China last without drastically raising rates?

Theme: China should have tightened rates much more aggressively by now, to handle the sharp rise in inflation. Instead, it has only tightened its key rate by 25 bps (SocGen calls for a 250 bps tightening).

Potential outcomes: Inflation should remain between 4 and 6%, as China deploys a diverse set of tightening tools. But China could also goes overboard with tightening measures, and then send its economy to a hard landing.

Source: Societe Generale

#4 Will the currency war lead to protectionist measures?

Theme: Developed and emerging economies will battle over who is doing what worse: developed economies with easy money policies or emerging economies with fixed exchange rates.

Potential outcomes: Most likely, developed economies will tighten policy while emerging economies raise the value of their currencies. China may move to valuing the yuan against a basket of currencies, rather than just the dollar. Or the U.S. may institute protectionist measures, which may have the negative side effect of lowering demand for treasuries.

Source: Societe Generale

#5 Will bond vigilantes turn their attention to the U.S.?

Theme: The U.S. dollar's position as the reserve currency allows it to keep spending without too much pressure. But if Europe sorts out its problems faster than expected, U.S. bond markets could come under speculative attack.

Potential outcomes: The U.S. is forced to go an austerity course in 2011, or it is allowed to muddle through and perhaps even engage in more QE.

Source: Societe Generale

#6 Will new banking regulation cause stress in markets?

Theme: New bank regulation rules are set, but they've yet to be implemented. Their implementation could cause stress on bank funding.

Potential outcomes: Europe runs a new stress test and sorts out its bailout fund. The U.S. finds a solution for its housing market by changing regulations, hitting bondholders.

Source: Societe Generale

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