The Fed cutting rates by 200 basis points and oil falling to $40 a barrel are among Standard Chartered's list of potential surprises for 2023




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  • Standard Chartered listed eight potential scenarios that could shock markets next year.

  • The Federal Reserve could cut interest rates by 200 basis points should the US suffer a deep recession, strategists said.

  • Oil could crash to just $40 a barrel if a global recession sets in and the Ukraine war is resolved, according to the bank.

The Federal Reserve slashing interest rates by 200 basis points and oil prices crashing by more than 50% are among potential economic and financial surprises that could roil markets next year, according to Standard Chartered.

In a report published Sunday, strategists at the UK bank listed eight potential upsets - currently underpriced by markets - that could spark further volatility in stocks, bonds and cryptocurrencies, all of which are on track to post significant losses in 2022.

One scenario would see the Fed do a policy U-turn to cut interest rates by 200 basis points, after the US suffers a severe recession in the first half of next year in the wake of the ongoing monetary tightening spree.

The US central bank has boosted rates by 350 basis points in 2022, and is also reining in the supply of money in the economy by slashing its balance sheet by $95 billion a month through a program called quantitative tightening (QT).

But there's a chance it will have to quickly pivot to monetary easing if economic data suggests it tightened too quickly, according to Standard Chartered.

"In 2023, what started as a mild malaise quickly becomes an economic panic," a team led by chief strategist Eric Robertson said, describing the potential surprise outcome. "Layoffs spread from the technology sector to housing and retail to industrials and financial services."

"A pause quickly becomes a pivot, which then becomes a full-scale reversal by mid-year," they added. "The Federal Open Market Committee halts QT and cuts rates by 200 basis points before the end of 2023."

Oil at $40?

In a separate scenario that would rattle markets, Brent oil prices could plummet to just $40 a barrel as demand slumps amid a recession, according to Standard Chartered. A resolution to the Russia-Ukraine conflict would also remove the war-related risk premium from energy costs, causing prices to fall.

The crude benchmark currently trades at $86.76 a barrel, so a slide to $40 would mean a 54% decline.

The convergence of a global recession, continued zero-COVID lockdowns in China and a ceasefire in Ukraine would unleash the "perfect storm" for oil markets, sparking outsized declines in prices, according to the bank.

"China experiences a surge in COVID cases, leading to nationwide lockdowns and significantly delaying its economic reopening," Robertson's team said, describing the surprise scenario. "The global recession spreads, with even previously resilient economies succumbing to a protracted decline in consumer and business demand."

"The decline in oil prices is exacerbated by the end of the military conflict in Ukraine," the strategists added. "With oil prices falling quickly, Russia is unable to fund its military activities and agrees to a ceasefire. The end of the war causes the risk premium that had supported energy prices to disappear completely."

Cryptocurrencies could suffer again in 2023, with one of Standard Chartered's upsets seeing bitcoin fall a further 70% to just $5,000 - with the largest token by market capitalization already losing 64% of its value this year.

The spectacular collapse of the FTX exchange last month could trigger a further rout for digital assets that could otherwise be supported by central bank pivots, according to the bank.

Here are five other potential upsets Standard Chartered said could shock markets in 2023:

  • The euro rallies 19% against the US dollar to trade at $1.25 after Russia agrees to a peace settlement in Ukraine.

  • The Nasdaq 100 plunges another 50% as tech companies suffer a wave of bankruptcies echoing the early-2000s dot-com crash.

  • The Chinese yuan reverses all of its losses from this year as Beijing aggressively reopens its economy, jumping 10% to 6.40 yuan per dollar.

  • Food prices plunge by around 15% as Russia ends its war in Ukraine, leading to excess supply and eventual deflation.

  • Republicans in the US House of Representatives vote to impeach president Joe Biden, stalling Democrats' momentum ahead of the 2024 presidential election.

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