Five big surprises for 2015
The price of oil halved during the final six months of 2014. Yes, some experts predicted energy costs would decline from $115 a barrel in June, but how many predicted Brent crude would trade below $55 for the first time in five and a half years so soon after?
And further surprises are inevitable in 2015, as they are in every year. That's why the helpful boffins at UBS have compiled a list of the potential banana skins for the next 12 months.
Aggressive Fed tightening
More rapid US growth, a faster-than-expected decline in unemployment and first signs of wage inflation suggest the Fed may already be 'behind the curve'.A more hawkish Fed could expose market fragilities, above all in credit fixed income (where selling liquidity is already poor) and in emerging debt and currency markets.
The overwhelming consensus of market participants expects the European Central Bank (ECB) to launch an aggressive programme of sovereign debt purchases ('QE') in the first quarter of 2015.
The risk, therefore, is that the ECB will disappoint market expectations, leading to setbacks in 'risk assets' and the dollar (owing to large overweight dollar positions in currency markets).
The most consensus view/position in markets (which we share) is for a stronger US dollar. An unexpected US slowdown or more rapid growth in Europe/Japan could lead to a sharp reversal of positioning, sending the dollar lower in the world's foreign exchange markets.
Sharp rise in oil prices
Spreading conflict in the Middle East could put at risk oil production and exports (similar to recent developments in Libya), sending oil prices unexpectedly higher. Regional uncertainty could also lift global risk premiums, placing further stresses on financial markets.
A big rally in global equity markets
Alternatively, if the eurozone can avoid deflation and political risk, Japan returns to growth, the US continues to grow without inflation (and the Fed normalises gradually), and China effectively manages its slowdown, global equities could rally on higher business confidence and capital expenditures, stronger M&A and an expansion of price/earnings multiples.
A 20 per cent-plus rally in global equities would constitute a clear surprise to the consensus.
This article was written for our sister website Money Observer
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
This is the opposite of inflation and refers to a decrease in the price of goods, services and raw materials. Economically, deflation is bad news: the only major period of deflation happened in the 1920s and 1930s in the Great Depression. Not to be confused with disinflation, which is a slowing down in the rate of price increases. When governments raise interest rates to reduce inflation this is often (wrongly) described as deflationary but is really an attempt to introduce an element of disinflation.