The 5 market worries investors can’t ignore, according to Citi

Investors should be wary of five key factors that could impact markets as the year progresses, according to strategists at Citi. The bank's analysts maintain a long-risk stance despite growing concerns across various fronts. The five risks they identify are a structurally hawkish Federal Reserve, global duration risk stemming from rising yields, a Japan carry unwind, a 1970s-style oil shock, and European natural gas disruption.

The Federal Reserve's tightening path is expected to continue, with four members of the hike-camp and three members viewing CPI as the primary driver. While a hike is now almost fully expected, the committee's final decision may vary based on the upcoming CPI data.

Global bond yields are rising due to higher energy prices, but Citi argues this is a short-term front-end effect rather than a sign of a prolonged fiscal term premium expansion. The bank has already taken profit on some Japan carry positions, noting that the yen term premium has been compressing since July.

Regarding oil, Citi believes the market is overreacting to a potential 1980s-style shock. Current inventories are far from the levels seen during the 1970s oil crises, and a partial reopening of the Strait of Hormuz by late 2026 could help bring Brent crude back to the $60s range in 2027.

European natural gas prices are also causing concern, with Citi estimating a materially lower winter TTF price of around €61/MWh compared to the current market price of €81/MWh. The bank believes the market is overpricing the probability of a sustained spike in commodity volatility.

Lastly, Citi warns of a potential AI regulation risk, which could lead to a pause in AI model training and create excess capacity. While the bank does not expect another major shock like DeepSeek, they caution that the current market sentiment may be overly optimistic about the potential impact of AI efficiency breakthroughs.