Monday, May 12, 2014

Roubini: Five risks markets could face

There are more rising risks emerging.

1.    The first is China and whether there will be a soft or a hard landing. I worry that the landing is not going to be very soft in China and it is going to be very bumpy and there will be a sharp slowdown, which is more than people are expecting.

2.    Secondly, there is the risk that the Fed is going to make policy mistakes as it exits monetary easing and adds a zero policy rate. When the Fed announced that last year that it would wind down its monthly purchases of long-term financial assets we saw a ‘taper’ tantrum in financial and emerging markets. While tapering is now priced in, there remains uncertainty about the timing and speed of the Fed’s actions.

3.    The third risk is that the Fed will exit zero rates too late. If you make the mistake of doing it too soon, then you have a hard landing of the economy. If it’s too late you take the risk of an asset price bubble.

4.    The next risk is arising from emerging markets being so fragile, particularly if you look at Russia, Hungary, Ukraine, Venezuela, and Thailand among others.

5.   Then there are two rising geo-political risks. One is the cold war in Russia (and Ukraine) and this cold war could end up becoming a full war, which is likely to try and destabilize Eastern Ukraine.

6.    The other geo-political problem would be the consequence of the rise in China where it sits in a world - in Asia - where you have a group of countries that have nationalist leaders (China, Japan, Korea, and India) and these countries also have major economic transformation issues to deal with. It could mean that if things go wrong on the economics side there is a risk they will blame the foreigners and all the territorial disputes that are ongoing between China in power and from its neighbours.

So those are the things I worry about today, from financial risk to geo-political risk.