In the financial markets, black swans happen. They are, by definition, an unpredictable or unforeseen event, that comes with extreme consequences, but their"close cousin, the grey swan, can be envisaged,"according to Nomura Global Research.The grey swans are "unlikely but impactful events" that "lie outside the usual base case and risk scenarios of the analyst community." The team at Nomura has come up with 10 potential grey swan events for 2017, forgoing more widely discussed scenarios to focus on the more under-the-radar topics."Needless to say, none of the them are our base case," according to the FX strategy team in the report. "But we think it is better to be prepared than not."Shock 1: 'US productivity boom'Global productivity has been lacking since the 2008 financial crisis, and in 2016, US productivity growth has "seemed to grind to a halt." This compares to an average of over 2% productivity growth since WW2, initially declining from the dot-com collapse and then sustained by the crisis.Looking at the past 10 years of data, it would be reasonable to expect productivity to range from -0.2% to 2.6%, according to global FX strategist Bilal Hazeez in the report. But, asks Hazeez, what if we are wrong' From a purely statistical perspective,"productivity is a volatile data set."Historically, investment has been a key contributor to poor productivity.Conventional investment in buildings and equipment is at recessionary levels, but digital investment in intellectual property and R&D is running at close to post-crisis highs and could provide the foundation for a surge in productivity, he writes. If this were to happen, implications for the markets would be huge, leading to strongerequity markets and a more aggressive Fed hiking path.Shock 2: 'China floats currency'The idea of China shifting to a floating currency in the near term is pretty low, and the current path of periodic FX flexibility combined with intervention is likely to continue over the next 12 months, according to Nomura Asia FX strategist Craig Chan.However, China's long-term goal is to move towards a free float, and in a grey swan event, it could happen sooner than expected with far reaching effects.If China were to suddenly adopt a free-floating FX regime and no longer intervene, the team believes the RMB would depreciate rapidly, leading to a sell-off in local markets and causing negative regional and global market contagion."The risk of China shifting to a free float could lead to a severe balance of payments shock with serious negative economic/financial market consequences." writes Chan.Shock 3: 'EU reforms, UK rejoins'2016 was the year politics "stumped the consensus" according toFX strategists Jordan Rochester and Anna Titavera, so why couldn't 2017 do the same' With Brexit, a Trump victory and the Italian referendum, inpolitics,"one cannot rule anything out." This includesa grey swan scenario in which the EU as a whole reforms and the UK rejoins.The team identify two ways in which this could happen. A UK-led movementto actually unwind the Brexit decision and rally around a single market access agenda, or an EU led one, in which the EU offers the reforms the UK has been asking for all along, including redefining the free movement of labor. According to the report, This could come as the EU attempts to limit the growing anti-EU sentiment in the euro area in a year of major elections across Europe.See the rest of the story at Business Insider
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