Oil plunge, tech collapse and Fed cuts? Strategist shares possible

After a tumultuous year for financial markets, Standard Chartered outlined a number of potential surprises for 2023 that it says are being “underpriced” by the market.

Eric Robertson, the bank’s head of research and chief strategist, said outsized market moves are likely to continue next year, even if risks decline and sentiment improves. He warned investors to prepare for “another year of shaken nerves and rattled brains.”

The biggest surprise of all, according to Robertson, would be a return to “more benign economic and financial-market conditions,” with consensus pointing to a global recession and further turbulence across asset classes next year.

As such, he named eight potential market surprises that have a “non-zero probability” of occurring in 2023, which fall “materially outside of the market consensus” or the bank’s own baseline views, but are “underpriced by the markets.”

Collapsing oil prices

Oil prices surged over the first half of 2022 as a result of persistent supply blockages and Russia’s invasion of Ukraine, and have remained volatile throughout the remainder of the year. They declined 35% between June 14 and Nov. 28, with output cuts from OPEC+ and hopes for an economic resurgence in China preventing the slide from accelerating further.

However, Robertson suggested that a deeper-than-expected global recession, including a delayed Chinese recovery on the back of an unexpected surge in Covid-19 cases, could lead to a “significant collapse in oil demand” across even previously resilient economies in 2023.

Should a resolution of the Russia-Ukraine conflict occur, this would remove the “war-related risk premia” — the additional rate of return investors can expect for taking more risk — from oil, causing prices to lose around 50% of their value in the first half of 2023, according to Robertson’s list of “potential surprises.”

“With oil prices falling quickly, Russia is unable to fund its military activities beyond Q1-2023 and agrees to a ceasefire. Although peace negotiations are protracted, the end of the war causes the risk premium that had supported energy prices to disappear completely,” Robertson speculated.

“Risk related to military conflict had helped to keep front contract prices elevated relative to deferred contracts, but the decline in risk premia and the end of the war see the oil curve invert in Q1-2023.”

In this potential scenario, the collapse in oil prices would take international benchmark Brent crude from its current level of around $79 per barrel to just $40 per barrel, its lowest point since the peak of the pandemic.

Fed cuts by 200 basis points

The main central bank story of 2022 was the U.S. Federal Reserve’s underestimation of rising prices, and Chairman Jerome Powell’s mea culpa that inflation was not, in fact, “transitory.”

The Fed has subsequently hiked its short-term borrowing rate from a…