Societe Generale is out with its latest quarterly chart of “swan risks” that threaten to rock the global financial markets. For the most part, the risks remain unchanged from September.
SocGen analysts reiterated that the two highest probability risks are a Brexit (45%) and an economic hard landing in China (30%). And what makes these two particularly notable is the possibility of spillover effects in both cases.
With a Brexit, there’s the potential economic ripple effect into the rest of Europe, which is already more politically divided than it has been in ages. As for the China hard landing (and/order the resulting EM crisis), it has the potential to trigger “a shock that could trigger global recession.”
However, “a China hard landing does not automatically lead to global recession; the quality of the policy response would matter given that indirect financial channels would be the main transmission channels to the advanced economies outside of Asia,” SocGen analysts write.
It’s worth noting that, technically speaking, “Black swan” risks are by definition extremely unlikely and nearly impossible to predict. So it’s a bit of a contradiction to assign such high probabilities to any of these events. Nevertheless, when these events do materialise, it’s bad. SocGen’s swan chart is just trying to show that major economic and geopolitical risks are brewing that could cause serious problems should they ever come into fruition.
On the positive end, SocGen also points to three upside risks: stronger investment and trade; more fiscal accommodation; and the possibility of fast-track reform.
Check out all the stewing swans below.
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