At the end of every year, Saxo Bank publishes its ten outrageous predictions for the year ahead, which tend to go against market consensus.

Indeed, at the end of 2016, while consensus was calling for a continued economic recovery, Saxo was predicting a “departure from the ‘business as usual'” mentality that’s plagued businesses and central banks since the 2009 crisis.

As it turns out, not all of these predictions were as outrageous as they first seemed. For example, the asset manager predicted that Bitcoin would surge in value from $700 to $2,100. As it turns out, this was a conservative estimate. Saxo also predicted that US healthcare reform would trigger sector panic, (which it has done to a certain extent) and that the Mexican peso/CAD rally would go into reverse (proved true in the first half).

As we head towards the end of the year, forecasts for 2018 are starting to emerge once again, and the consensus seems to be that the most prominent risk facing markets next year is central bank balance sheet unwinding.

According to analysts at Australian investment bank Macquarie, the big question for 2018 is whether the decade-long policies from investment banks and China’s stimulus have finally restarted a self-sustaining recovery?

Central Bank Outlook Dominates 2018 Predictions

This year there has been a broad recovery in economic growth and inflation around the world, signs are beginning to show that the world’s recovery is finally gaining traction. However, whether or not central banks can maintain this growth, while at the same time turning off stimulus remains to be seen. Unfortunately, Macquarie remains convinced “that there is no evidence of sustained private sector recoveries” and all of the green shoots that have been appearing are just ” a familiar cycle of liquidity, asset inflation, and China.” If this is the case, then “withdrawing liquidity and/or trying to raise the cost of capital could backfire.”

The ‘canary in the coalmine’ so to speak, will be asset volatility according to the bank’s analysts. If there is a sustained private sector recovery, volatile should remain subdued as the punch bowl is withdrawn. If the private sector recovery really is non-existent, then the hawkish policy would be “devastating to over-financialized and productivity-starved economies reliant on assets and leveraging for growth.”

Overall, Macquarie notes three critical risks to assets next year:

” First, our key concern is the impact of liquidity withdrawal and persistence by CBs in trying to raise cost of capital, irrespective of evidence that neither supply nor demand can support higher rates. If we take CBs’ rhetoric at face value, it is likely that liquidity injections could compress by more than US$1 trillion in ‘18, turning negative in ‘19. While CBs promise to be careful, this is a fundamental shift, akin to mixing combustible elements, with highly unpredictable results. Neither FI, FX nor equities are ready. Second, we are concerned that China might not fully realize the extent to which global recovery is contingent on its ability to maintain commodity-intensive growth. This is particularly critical, following recent power consolidation. Third, any sign of an even mild stagflation (due to supply side and/or pockets of tightness) might prompt CBs to overreact, trying to get ahead of ‘behind the curve’ narrative.”