What could go wrong in 2021? What could go right? HSBC’s economists and strategists have highlighted what they consider to be the most significant risks globally. These are possibilities, not forecasts. They vary in probability and possible impact, both globally and regionally. None may happen – but any could spring a surprise.

Economies quickly rebound as vaccines are rolled out. However, a virtuous US growth cycle could lead to the dollar strengthening, easing disinflationary pressures in the Eurozone, but with a varying impact on emerging economies’ currencies. Under this scenario, 10-year US Treasury yields would likely rise above 2 per cent.

Multilateralism is re-energised as, under Joe Biden, the US re-embraces the World Trade Organization and Paris Agreement - and even leads in helping low-income nations, possibly by boosting the IMF’s assistance capacity. A better global-trade climate would help export-oriented economies in Asia and commodity producers.

US-China trade relations may be less volatile but a positive surprise would be the new US administration completely removing tariffs on imports from mainland China and announcing no further restrictions on investment or trade flows.

Mainland China’s interest rates will not change this year under our base case, but stronger-than-expected demand or a property boom there could trigger earlier rate hikes that strengthen the renminbi.

Environmental, social and governance strategies are adopted at an accelerated pace in 2021 now that Joe Biden is US president. US investors would favour ESG-friendly companies over fossil-fuel heavy sectors and would favour green bonds that finance ESG projects.

Negative interest rates remain a live debate even if we expect no further rate cuts from G7 central banks in 2021. Although the probability is small, the impact would be big.

A new ‘taper tantrum’ may emanate from emerging countries rather than, as in May 2013 when the US Federal Reserve spooked markets by curbing its quantitative easing programme. Emergency policy moves in emerging economies took interest rates to record lows last year, encouraging unprecedented large-scale bond buying.

A commodity price shock in 2021 would likely mean that low inflation expectations in developed economies and significant labour-market slack would prevent a response from wages and thus would squeeze disposable incomes. But emerging markets could expect deteriorating inflation expectations, weaker currencies and higher inflation that, at the extreme, leads to increased interest rates. Major emerging-market commodity importers would suffer while commodity exporters benefit, but demand for their products would evolve over time.

Europe’s pandemic support weakens later this year as growth rebounds. Domestic political pressures in northern countries, particularly given German elections in September, could see political will for policy support fragment. Some European Central Bank policymakers might also argue for reducing monetary support, which could trigger volatility and create downside risks for the euro.

Disruption in financial markets – for example more frequent volatility spikes or funding difficulties – could unnerve investors. The US dollar and cash would be the main beneficiaries.

First published 11 January 2021.

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