Yahoo Finance

• Standard Chartered listed eight potential scenarios that could shock markets next year.

• The Federal Reserve could cut interest rates by 200 basis points should the US suffer a deep recession, strategists said.

• Oil could crash to just $40 a barrel if a global recession sets in and the Ukraine war is resolved, according to the bank.

The Federal Reserve slashing interest rates by 200 basis points and oil prices crashing by more than 50% are among potential economic and financial surprises that could roil markets this year, according to Standard Chartered.

In a report published on December 3, strategists at the UK bank listed eight potential upsets — currently underpriced by markets — that could spark further volatility in stocks, bonds and cryptocurrencies.

One scenario would see the Fed cut interest rates by 200 basis points, after the US suffers a severe recession in the first half of next year in the wake of its ongoing monetary tightening spree.

The US central bank has already boosted rates by 400 basis points in 2022, and is also reining in the supply of money in the economy by slashing its balance sheet by $95 billion a month through a program called quantitative tightening (QT).

But there's a chance it will have to quickly pivot to monetary easing if economic data suggests it tightened too quickly, according to Standard Chartered.

"In 2023, what started as a mild malaise quickly becomes an economic panic," a team led by chief strategist Eric Robertson said, describing the potential surprise outcome. "Layoffs spread from the technology sector to housing and retail to industrials and financial services."

"A pause quickly becomes a pivot, which then becomes a full-scale reversal by mid-year," they added. "The Federal Open Market Committee halts QT and cuts rates by 200 basis points before the end of 2023."

In a separate scenario that would rattle markets, Brent oil prices could plummet to just $40 a barrel as demand slumps amid a recession, according to Standard Chartered. A resolution to the Russia-Ukraine conflict would also remove the war-related risk premium from energy costs, causing prices to fall.

The crude benchmark currently trades at just over $80 a barrel, so a slide to $40 would mean a 50% decline.

The convergence of a global recession, continued zero-COVID lockdowns in China and a ceasefire in Ukraine would unleash the "perfect storm" for oil markets, sparking outsized declines in prices, according to the bank.

"China experiences a surge in COVID cases, leading to nationwide lockdowns and significantly delaying its economic reopening," Robertson's team said, describing the surprise scenario. "The global recession spreads, with even previously resilient economies succumbing to a protracted decline in consumer and business demand."