Bank of Canada released its Semi-Annual Financial System Review today. Interestingly it continues to be concerned about growing levels of household indebtedness and the potential impact it may have on the real estate markets. When looking at its risk chart, it is interesting how it has changed from the summer. It has removed the risks of a European crisis and risks of a sharp rise in long-term interest rates, and replaced them with -
1. An abrupt increase in global risk premium
(he can't be talking about the high yield bond crisis south of the boarder, can he?)
2. A prolonged weakness in commodity prices.
I do agree with the fact that they associate a higher probability with the risks of a China and Emerging market crisis and prolonged weakness in commodities as the two go hand and hand. The one thing that the graph fails to illustrate is the fact that all 4 risks are interconnected and the risk that as one worsens, it will have a contagion effect on all the others, making the probability of one, materially increase the risk of the others occurring. The macroeconomic conditions of 2016 will be more important then ever.