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•	Corporate debt defaults start slowly and then cascade to state-sponsored entities leading to ratings downgrades. AP photo
• Corporate debt defaults start slowly and then cascade to state-sponsored entities leading to ratings downgrades. AP photo

Here are eight big market risks for 2021, according to StanChart

Investors have found some consensus on a recovery in growth and inflation heading into the new year, driving global yield curves steeper, rallies in corporate bonds and a slide in the U.S. dollar

What could go wrong for investors next year after the ultimate black swan event of the coronavirus pandemic? Well, a lot, judging by Standard Chartered Plc’s list of potential market surprises for 2021.

Democrats winning control of the Senate, a U.S.-China detente driving a yuan rally to 6 versus the dollar, or oil crashing to $20 per barrel on an OPEC rupture. Those are among the eight “unlikely" events that could upend markets, according to the bank’s global head of research, Eric Robertsen, in an annual financial-markets surprises report.

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A pandemic wasn’t on too many lists last year, but global markets have largely recovered from the shock, helped by emergency fiscal- and monetary action. Investors have found some consensus on a recovery in growth and inflation heading into the new year, driving global yield curves steeper, rallies in corporate bonds and a slide in the U.S. dollar.

As such, the biggest blow would be a setback to vaccine delivery, in Robertsen’s view.

“With some measures of risk trading back at pre-Covid lows, the ‘reflation’ consensus appears especially vulnerable to bad news," he wrote.

As for last year’s “non-zero probability" events, Robertsen did nail it with his vision of the Fed slashing interest rates and gold hitting $2,000 an ounce on extended central bank asset purchases. He was also close with a 20% gain in the S&P 500. Here is his latest tally of underpriced risks for next year:

1. Democrats win Georgia’s seats to take the U.S. Senate

• The Democrats initiate legislative agenda to raise taxes and regulatory changes targeting the technology sector

Impact: Technology shares plummet and U.S. Treasury yields surge on supply fears.

2. U.S. and China find common ground

• China agrees to let its currency appreciate in an attempt to lift purchasing power for its companies and consumers.

Impact: USD/CNY falls to 6.00.

3. Monetary and fiscal stimulus drives strongest recovery in a century

• Eager to capture gains in real assets, investors and traders shift increasing amounts of capital to markets like copper.

Impact: Copper rallies 50%.

4. OPEC splinters

• In order to plug fiscal finances, oil exporters abandon supply quota and OPEC co-operation collapses.

Impact: Oil prices fall back to $20 a barrel.

5. European fiscal stimulus hopes dashed

• ECB’s ability to support the recovery is increasingly called into question with zero policy rates and balance sheet approaching 100% of GDP.

Impact: EUR/USD falls to 1.06 by midyear.

6. U.S. Treasury secretary abandons strong dollar policy

• When Congress fails to cooperate on a fiscal package, Treasury Secretary-elect Janet Yellen talks down the dollar to ease financial conditions.

Impact: Dollar crashes 15%.

7. Emerging-market debt defaults and sovereign downgrades

• Corporate debt defaults start slowly and then cascade to state-sponsored entities leading to ratings downgrades.

Impact: EM equities fall 30% by second quarter, in worst year for EM since 2013.

8. U.S. President Biden steps down

• Frustrated at failure to bridge gap between Republicans and Democrats, and under strain from mounting protest and social unrest, Biden resigns in favor of Vice President Kamala Harris.

Impact: Sharp correction in U.S. equities, credit spreads widen, dollar decline accelerates.

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