The most significant change over the last few weeks has been a sharp rise in government bond markets. The extent of the move has surprised the market given the fresh buying by the US Federal Reserve. In part it reflects an extension of tax cuts that further delays any attempt to reduce the budget deficit. The simple fact that rates got to such a low level will also have played a part in the correction. The combination of strong earnings growth, better than expected economic data and money printing helped push equity markets higher. The S&P 500 has exceeded its post-Lehman’s high. Emerging markets have lagged as investors are becoming increasingly concerned about rising inflation. This is a topic we will cover in more depth in next month’s outlook. The gold price hit new highs in US dollars, sterling and euro terms. In the first half of the year, the press was full of stories of central bank buying, vending machines in airports selling gold coins, Harrods selling gold bars and hedge funds piling in. July saw a meaningful correction in the price. The powerful rally since the July lows has attracted few headlines. Could this be a sign that central banks in emerging nations are quietly adding to holdings? This would certainly seem like a sensible policy at a time when the US is printing money and the euro is under threat. We still believe in the long-term case for gold. Still, when one of our external analysts raises their price forecast from $850 a year ago to $2,000 today, we know there are fewer sceptics around. This means that the odds on a correction have grown. Surprises in 2010 have generally been of the pleasant variety. The recovery has strengthened, investors have enjoyed gains across a broad range of assets and none of the major structural issues we face have led to real stress, unless you are Greek, Irish, Portuguese or Spanish. Looking forward… Here are eight events that could upset the consensus next year. They range from the distinctly possible to the more improbable.

1. Oil price spike triggers a slowdown While the global economy will continue to operate at two speeds - rapid growth in emerging economies and more muted activity in the developed world - this growth will prove sufficient to tighten the oil market. OPEC will be slow to increase production when they are nervous about the value of the dollars they are receiving due to the ongoing money printing. Increasing petrol prices will act as a tax on consumption, triggering a sharp slowdown in growth. Equities will suffer as growth forecasts are cut, with the notable exception of energy shares. Inflationary fears will push up bond yields, but this will prove to be a buying opportunity as the slowdown will reignite deflationary fears in the developed world.

2. Inflation in emerging economies soars Market forecasts of a mild increase in inflation in 2011 followed by a decrease in 2012 prove too optimistic. With the recession of 2008 a distant memory, consumer and business confidence rise in tandem and economic growth surprises on the upside. Authorities continue to resist both meaningful currency appreciation and interest rate rises. Other tightening measures prove insufficient to cool demand. Commodity price increases combine with wage inflation to send inflation significantly higher. Emerging market debt markets will suffer. Margin pressures mean emerging equities will lag developed markets where wage inflation will remain low. The pace of currency appreciation will eventually increase.

3. The US economic recovery continues but the Fed prints more money Robust economic data will lead commentators to question the need for the current round of quantitative easing. A change of the guard on the US Federal Reserve sees the one member who voted against QE, Hoenig, step down, but he is replaced by two dissenters in Plosser and Fisher. However, stubbornly high unemployment and a string of core inflation releases below 1% persuade those that voted in favour that they have no alternative but to continue with the existing policy. QE2 is expanded from $600m to $1,000m. Easy money continues to provide a positive impetus to risk assets. On its own, this policy is dollar negative. However, the direction of the dollar will be set by events in Europe.

4.The euro crisis accelerates, forcing debt restructuring The European authorities continue to work to a slower timetable than the bond market. Their delays prove disastrous as the market pushes bond yields in Portugal and then Spain beyond the point of no return. A bank holiday is declared across the euro area. Investors return to a different financial landscape, with sovereign debt restructured, some banks nationalised, others having had debt converted to equity, and regulations eased to allow the survivors to earn enough to create a strong banking sector. The crisis will send the euro-dollar exchange rate sharply lower. The resolution is unlikely to be entirely convincing, but will be sufficient to trigger a powerful rally in both the currency and the banking sector.

5. The UK coalition splits leading to a general election Pressures within the Liberal Democrat party come to a head at the autumn conference. It becomes clear that the leadership is out of step with the party. A vote of no confidence is followed by a leadership challenge, spelling the end of the coalition. A general election once again fails to deliver a clear majority. However, with Gordon Brown gone, the Lib- Dems form a coalition with their more natural partners, Labour. Political instability would hit both sterling and gilts. The result would fail to reverse the decline as the austerity agenda is diluted.

6. The Australian housing bubble bursts Gravity reasserts itself in the one housing bubble that remained unpricked by the global financial crisis. There is no dramatic event to trigger the downturn. Instead, the realisation that prices are no longer rising combined with the huge slice of income going to mortgage payments sees the market collapse under it own weight. The Australian dollar declines and the banking sector suffers. Still, the “lucky country” does not experience a major financial crisis as commodity demand from buoyant emerging economies remains a significant plus

7. Surging food prices lead to riots in emerging countries Inventories for a number of agricultural commodities are at precariously low levels. At the same time, the rapid growth in emerging markets means a number of major producers are now becoming major consumers. Prices spike leading to severe social tensions, particularly in the poorest countries. Export bans become more widespread as governments want to be seen to act, even if events are beyond their control. This adds to the inflationary pressures within emerging economies. There are few winners outside agricultural commodity futures and equities.

8. The fine wine market collapses Rising inflation in China leads to more tightening measures. The domestic property and stock markets are propped up but there is no such help for the wine market, which has been fuelled by Chinese buying over the last few years. It becomes evident that high prices have attracted large scale counterfeiting. The loss in confidence sends prices sharply lower. Bordeaux is back on the menu for Christmas 2011.