Credit Suisse highlights 10 risk surprises for 2023

Strong stocks and surging bond yields are among the ten potential surprises outlines by the Credit Suisse global strategy team.

“For the past 30 years, at the start of each year we have looked at where the risks lie to our central scenarios,” analyst Andrew Garthwaite wrote in a note.

The scenarios are:

1. The S&P 500 (SP500) (NYSEARCA:SPY) rallies to 4,500 vs. central scenario of caution on equities

“Inflation falls in line with prices paid and the Fed starts to have renewed confidence in its inflation models, allowing it to pivot aggressively. Much more importantly, the fall in inflation must be associated with a larger fall in wage growth.”

2. Japan yield curve control ends in Q1 and BOJ hikes in 2023 vs. central scenario YCC continues for now

“The logistical issues of yield curve control are only increasing (with the BoJ owning nearly 60% of the 7-to-10-year areas of the JGB market) … It might also be politically prudent given that the weak yen (FXY) policy is now unpopular (as it has caused cost-push inflation) and from here has little benefit, in our view (the yen is already weak enough to limit offshoring).”

3. Yen vs. U.S. dollar (DXY) (UUP) rallies to 100, leading to an outperformance of domestic Japan vs. house view of yen appreciation to 120

“Between March 1995 and August 1998, the yen weakened from yen/$ 80 to yen/$ 145. As the carry trade unwound with the collapse in liquidity caused by LTCM, the yen rallied over the next year from yen/$ 145 to yen/$ 100 (i.e. c30%). This time around, the carry trade has been on for much longer and thus in turn the rally on the unwind should be greater than that of 1998.”

4. 10-year Treasury yields (US10Y) (TBT) (TLT) rise to 5% vs. house view of 3.3%

“Bond yields might end up closer to 5%, owing to: The bottom-up push to yield from Japan and Europe … US long-term inflation breakevens are too low … Central banks pushing up their inflation targets” and bond supply.

5. China has a hard landing vs. house view of 5.1% GDP growth

“The catalysts for a potential China bust: China house prices fall 20% … China enters deflation, pushing up real rates … As China opens up, it moves into a current account deficit … Limited fiscal capacity to respond, with the realization that the fiscal position is much worse than it looks with and higher real rates.”

6. U.S house prices fall by 20%+ vs. central scenario of a modest decline

“In very simple terms, real mortgage rates imply a 20% fall in housing starts, which also implies a 20% fall in house prices. As highlighted in our fourth surprise, there is a risk that bond yields could rise to 5%.”

7. Italy has a funding crisis vs. central scenario spreads do not widen significantly

“Essentially, we could get a crisis if EU rates rise by more than expected and at the same time Italy backtracks on reforms.”

8. The war in Ukraine ends vs. central scenario the war continues through 2023

“At some point, Putin may realize that with Western military aid increasing into offensive weapons, this is a war he cannot win. At the end of 2022, Russia held only c17% of Ukrainian territory, compared with c24% at the end of March, at the height of its advance. Over time, Western training and weaponry are likely to only increase the fighting capability of the Ukrainian army.”

9. Gold prices (XAU:USD) (GLD) rises to $2,500/ounce vs. house view that gold falls to $1,850

“Central banks are desperate to find an alternative reserves currency. If all central banks with less than 10% of reserves in gold went to 10% (and some central banks have nearly 80% of reserves in gold), then gold demand would rise 1.6x.”

10. Oil prices (CL1:COM) (CO1:COM) (USO) (BNO) rise to $120/barrel vs. house view of $85 for 2023 and $80 for 2024

“How could oil go to $120? … China opening up adds c1-1.5 mbd to demand … Risk of bigger outages materializes … Russian sanctions on petroleum products … Shale response remains muted … OPEC+ choose to push up the oil price … The end of the rundown of strategic reserves … Speculators are still short.”

See why Wells Fargo says equities need a breather.