Nomura's event risk radar aims to identify the key risk events we are watching beyond the typical data and central bank policy cycle
Key events to watch in the short-term include major check-points in the Brexit process and the Italian elections
Beyond the immediate horizon, the Mueller investigation, the tension between North Korea and the US and China's growth story should be the ones to watch
There is an undeniable correlation between geopolitics, market sentiment and the macro trading environment. In an era when a possible geopolitical escalation could be triggered by a single tweet, developed markets are beginning to behave more and more like emerging markets and politics is a major influencer.
Our risk radar aims to identify some of the event risks we are watching to navigate increasingly politically-driven markets.
These are the top five market moving events that should be on your radar:
- Check points in the “Brexit” process: Plenty of key dates in the “Brexit” process are on the horizon.The UK will be outlining its desire for an open-ended transition period and 60 per cent of businesses will decide whether it will trigger its contingency plans based on the outcome of the EU summit on 21-22 March. At this stage, conditions for the UK look favourable (Trading the road to Brexit (Part III)) and the market has assigned a high probability of a transitional deal being made soon. An open ended transition period-if secured in time-will be positive for markets.
- Italian election risk: The election on 4 March resulted in a hung parliament (Italy-Post -election scenarios), suggesting either new elections or a coalition among the parties, with the latter the most likely option. The focus in coming weeks will be on any post-election coalitions that could be formed to create a majority government, which could lead to compromises on political agendas and delays in implementing necessary structural reforms. Nevertheless, we believe the risk of a referendum on EU membership is quite low.
Mueller investigation: While the Trump-Russia investigation is not expected to finish any time soon, the details of it may be leaked during its progress (President Trump and Controversies: What Are the Risks and Implications?). What we know so far does not suggest anything particularly close to Trump; however, things could change as the investigation continues.
- Tensions between North Korea and the US: Tensions between the two countries are at their highest since 1994. We believe geopolitical tensions on the Korean peninsula will remain elevated, yet contained, for some time. However, the risk of military confrontation is certainly there and it is non-negligible (Brinkmanship on the Korean peninsula).
- China focusing on quality of growth: The government has put more emphasis on the quality of growth rather than the speed, suggesting that more structural reforms will be rolled out and financial deleveraging will continue in 2018. As a result, growth will likely slow due to a cooling property market and tighter liquidity conditions, and be further rebalanced from investment-driven to consumption-led. The increasing differentiation in the economy will also mean market shares will start consolidating to stronger companies and credit spread will start to widen.
For a full list of events we’re watching out for, please read Nomura’s Event Risk Radar.