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By Ambrose Evans-Pritchard
The Royal Bank of Scotland (RBS) has advised clients to brace for a "cataclysmic year" and a global deflationary crisis, warning that the major stock markets could fall by a fifth and oil may reach $US16 a barrel.
RELATED STORY: It's not just oil! - 10 non-energy stocks crushedThe bank's credit team said markets are flashing the same stress alerts as they did before the Lehman crisis in 2008.
"Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small," it said in a client note.
Andrew Roberts, the bank's credit chief, said both global trade and loans are contracting, a nasty cocktail for corporate balance sheets and equity earnings, and uncharted waters given that debt ratios have reached record highs.
RELATED STORY: Stocks Sink in Late Trading - Consumer Stocks Take a Beating"China has set off a major correction and it is going to snowball. Equities and credit have become very dangerous, and we have hardly even begun to retrace the 'Goldilocks' love-in of the last two years," he said.
Mr Roberts expects Wall Street and European stocks to fall by 10pc to 20pc, with an even deeper slide for the FTSE-100 thanks to its high weighting of energy and commodities.
"London is vulnerable to a negative shock. All these people who are 'long' oil and mining companies thinking the dividends are safe are going to discover that they're not at all safe," he said.
Brent oil prices will continue to slide after breaking through a key technical level at $US34.40, with a "bear flag" and "Fibonacci" signals pointing to a floor of $US16.
The bank said a paralysed Opec seems incapable of responding to a deepening slowdown in Asia, the swing region for global oil demand.
Morgan Stanley has also slashed its oil forecast, warning that Brent could fall to $US20 if the US dollar keeps rising, arguing that oil is intensely leveraged to any move in the dollar and is now playing second fiddle to currency effects.
RBS forecast that yields on 10-year German Bunds would fall in time to an all-time low of 0.16pc in a flight to safety, and may break zero as deflationary forces tighten their grip.
The European Central Bank's policy rate will fall to minus 0.7pc. US Treasuries will fall to rock-bottom levels in sympathy, hammering hedge funds that have shorted US bonds in a very crowded "reflation trade".