Daily Management Review

Societe Generale names main risks for global markets


05/31/2017


Possible failure of US President Donald Trump's plan to reduce taxes is the biggest risk of a "black swan" for world markets, analysts at Societe Generale believe.



Gage Skidmore via flickr
Gage Skidmore via flickr
"Black swans" are difficult-to-forecast and rare events, which, however, have significant consequences and can cause chaos in the financial markets. The term "black swan" was introduced by the statistician, researcher and former trader Nassim Nicholas Taleb.

Societe Generale sees a 30% risk that Trump will not be able to provide tax cuts, which will lead to a sharp slowdown in the US economy in 2018. There is also a possibility of sudden growth due to fiscal stimulation.

"As China tightens its policy, what is happening in the United States has become critically important," said Societe Generale’s economists. "We expect a slight tax cut in the US, but we believe that Trumpflation (inflation in the United States under Tramp) is insufficient to compensate for the decline in Xiflation (inflation in China under Xi Jinping). Without a tax cut, the US economy could significantly slow growth in the second half of 2018". 

The current period of economic growth in the US has started in June 2009 and is now the third in duration. If growth continues until February 2018, it will be the second in duration. For the current period of economic growth to become the longest, it should continue until May 2019. If the Trump administration implements the tax reduction plan, this may happen, although Societe Generale’s analysts do not expect that the growth will last much longer than this time.

"Our analysis shows that China, South Korea, Australia, the USA, Germany, the United Kingdom and Japan are in a more mature phase of the cycle, but the rest of Europe is rapidly gaining momentum, as the gap between potential and real output continues to decline. Latin America and Russia are still lagging behind", the economists believe.

The second most important risk of the "black swan" is the political uncertainty in Europe, as some countries in the region have to hold elections. Nevertheless, after the presidential elections in France, the bank lowered the risk assessment of shocks related to political uncertainty from 30% to 25%. The main concerns now are the elections in Italy and Brexit.

In China, according to analysts, the risk of political mistakes persists. However, the short-term risk of a "hard landing" of the Chinese economy has declined, says Societe Generale. The economists have lowered the risk assessment from 20% to 15%, but expect that they will raise it again after the October plenum of the Central Committee of the Communist Party of China.

source: businessinsider.com






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