“The Fed didn’t see inflation coming and in their quest to fight inflation may not see a financial accident coming,” he said. “It’s quite possible the Fed is underestimating the risk of financial catastrophe.”

Loading

China stumbles

Chinese stocks have jumped about 35 per cent from their October nadir on the prospect of the world’s second-biggest economy fully reopening from lengthy and draconian lockdowns.

Weighing against this optimism is the danger of the health system being overwhelmed as infections surge, and economic activity collapsing. Crowded hospitals and queues at funeral parlours have caused alarm in recent weeks, and been accompanied with a drop-off in social mobility in major cities.

“China’s infection curve will rise and will only peak one or two months after Chinese New Year,” said Marcella Chow, global market strategist for JPMorgan Chase.

She expects the nation to succeed in reopening but still cautions of “risk in terms of how COVID evolves.”

The rebound in Chinese equities remains fragile and any prospect of stumbling in economic activity would sap demand in commodity markets, particular for industrial metals and iron ore - a big risk for countries such as Australia.

Russia-Ukraine war

“If the war worsened and if NATO became more directly involved in hostilities and sanctions ratcheted up, it would be quite negative,” said John Vail, chief global market strategist for Nikko Asset Management.

Secondary sanctions against Russian trading partners, notably India and China, would amplify the effect of current restrictions at a perilous moment for the global economy, according to Vail.

“That would be a major supply shock for the world in terms of food, energy and other items like fertiliser, certain metals and chemicals,” he said.

An even more alarming scenario would be the use of a tactical nuclear weapon by Russia — a threat that appears distant but within the realms of possibility. That could end Ukraine’s agriculture exports in one fell swoop.

Emerging markets slump

Many investors see the US dollar’s strength easing in 2023 and energy costs falling — two factors that would relieve pressure on emerging markets.

Any failure to curb inflation would scuttle this outcome for currency markets, while an intensification of the war in Ukraine is just one of many risks that could send energy prices skyrocketing again.

Loading

“We may well go through another year where emerging markets struggle,” said Shane Oliver, head of investment strategy and economics for AMP. “A still-high or possibly rising US dollar would work against emerging market countries because many have US-dollar-denominated debt.”

The pain from this scenario would be particularly acute for emerging-market governments that would have to bear an even heavier burden of debt raised in dollars.

COVID rerun

A more contagious or deadly strain of COVID-19, or even the present variants lingering longer, could begin to jam up supply chains once more, which would ripple on into inflation and slow economic activity.

“We believe the macro hit to growth would be most felt by larger economies and those more dependent on trade,” said JPMorgan’s Chow.

For now, she’s betting that the virus will continue to recede and expects negativity in markets to be focused more on investors pricing in recession in the US and Europe.

Bloomberg

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.