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 medium-term include several new G10/EM central bank governor appointments 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:
BOJ Governor Kuroda’s terms could end in April: General opinion polls among market participants indicate Mr Kuroda’s reappointment is likely and the Bank of Japan’s (BOJ) current policies will probably continue (Policy implications of BOJ governor candidates). However, there is a tail risk of Prime Minister Abe embarking on further experiments by appointing a more dovish Governor.
Italian election risk: We still believe the election on 4 March will result in a hung parliament and a coalition among the majority parties, even though we believe the new “Rosatellum Bis” electoral law reduces the likelihood of a euro-sceptic anti-establishment majority. 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 anytime 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.