Ten global market calls for 2014

Today, as there will be lots of commentary on Ireland, let’s go large, gain altitude and look at the broad global economic canvas, to see what is likely to happen in 2014. Making forecasts is risky business, but so too is life – and as return is the opposite of risk, you will hardly get one without the other. So let’s take a plunge and outline my top ten global financial/economic forecasts for the year.

1 The background noise in 2014 will be one where the US – and maybe Britain – tries to reverse the monetary easing of the past five years.

While this may point to higher interest rates in Britain and the US, it will certainly mark the end of the free liquidity which drove prices of everything from Francis Bacon paintings, expensive footballers to upscale apartments in Knightsbridge through the roof. We know that liquidity squeezes are to trophy assets what open goals are to Francisco Torres; they don’t like each other.

2 Countries with large current account deficits don’t like liquidity squeezes either, particularly emerging markets countries and currencies. So at least half of the former BRICs – the Brazil and India bits – will have a torrid time.

3 The other bit of the BRIC equation – Russia – is likely to have a very interesting year. The greatest leading indicator to wobbles is always supreme confidence and Putin’s release just before Christmas of Mikhail Khodorkovsy, the former oil tycoon who was imprisoned for ten years, was a sign of unassailable self-confidence. But next year’s Winter Olympics in Sochi are likely to be dogged by riots in Ukraine, the impact of falling energy prices and dramatic deterioration of relations between Moscow and Berlin.

4 Speaking of oil prices, lots and lots of new oil production will come on stream from shale in the US to increased output in Libya and elsewhere. This will drive down the price of energy. Normally Saudi Arabia would respond to too much supply by cutting its own production to keep prices high.

This won’t happen this time because it feels very threatened by the US overtures to Iran – because the one country the Saudis dislike more than Israel is Iran. We all know how family rows can be much more vicious than most and within the Muslim family the Sunni/Shia row, being played out in the civil war in Syria, is as bad as its ever been.

5 France heads straight into recession, which it has been threatening for some time, driven by faltering industrial production.

With an ineffectual president, a growing problem in its current account and unions which render the country incapable of sorting itself out, the French budget deficit will expand rapidly, shoving it up against EU ”fiscal compact” constraints. France will kick out against Germany. This spat will undermine the euro, which was already heading down against the dollar based on interest differences anyway.

6 Draghi’s bank stress tests all over the eurozone will throw up all sorts of ugly and nasty surprises as the balance sheet legacy of the euro’s first seven disastrous years becomes exposed. If you want to see how much cash will have to be shipped into certain peripheral banks, look no further than the bucket of capital KBC Belgium had to ship over to its Irish operations in late November.

The bank stress tests may force another bout of wobbles on the periphery, but the most likely outcome is that the ECB will have to spend money.

Up to now Draghi has kept the bond markets on side by threatening to intervene to prop up any peripheral in danger. With the stress tests and ongoing deflation in most of the eurozone, it is likely that the ECB will have to begin a QE type policy of actually rather than pretending to buy government bonds. This will put it on a collision course with Germany, as is typical in these events. I expect Draghi to win whatever battle ensues.

7 In Japan, the economy is likely to splutter because its simply too old to grow vigorously.

This forces the government into a massive dose of monetary stimulus again, forcing down the yen and pushing up the stock market. The yen ”carry trade” is the dominant source of financing for international financiers (borrowing in yen and investing elsewhere). This materialises in Dublin in the price of top end real estate on the docks because this is precisely how the big foreign guys are financing their hoovering up of Dublin’s property.

Because interest rates here remain low, the property market in swankier Dublin addresses will move upwards with the steel, glass and chrome end of the market out-performing.

8 Staying global, but with a local angle, 2014 will be the year when some of the more ludicrous valuation on social media companies and the like, fall back to earth.

As liquidity dries up, so too does speculation and therefore, the notion of a company being valued as billions with no profits will become anachronistic.

Expect large falls in the share prices of some of Dublin’s newer technology tenants.

9 Even though China’s Shanghai Composite index has fallen for the fourth year in succession, the fact that unlike India, China can fund itself easily means it might be better able to deal with its wobbly banking system than other places.

10 Finally, for the thousands of our brothers, sisters, sons daughters and cousins living in Australia, the Australian economy is slowing, but a massive expansion in the budget deficit will keep it creating jobs this year. The Aussie dollar is defying gravity despite the best efforts of the finance minister to talk it down. But surely it can’t remain the lucky country indefinitely?

And one last thing – sterling is likely to continue strong against the euro, which is good for Irish exporters.

There you have it. Happy New Year.

David McWilliams has just lunched a new daily global economics newsletter globalmacro 360.com Sign up now for your free trial