- In Europe, Brexit negotiations and the concerns about euro area growth outlook dominate
- Further afield, we're watching the China slowdown vs US outperformance in and among trade war and peace
- The pressures emerging markets face continue to feature heavily in global risks
There is an undeniable correlation between geopolitics, market sentiment and the macro trading environment. In an era when a single tweet could trigger a geopolitical escalation, developed markets are beginning to behave more like emerging markets and political wrangling continues to be a major driver.
Our risk radar identifies some of the event risks we are watching to navigate increasingly politically-driven markets. These are the five key risks that should be on your radar:
The US Section 232 auto investigation deadlines: By 17 February, the Department of Commerce has to deliver its Section 232 report on auto imports to President Trump, but it could be delivered sooner. Once delivered, the President will have 90 days to make a decision as to whether he agrees with the assessment from the Department of Commerce. We expect the Department of Commerce to find that auto imports threaten to impair national security and recommend a combination of tariffs and quotas. President Trump will likely use the recommendation as leverage for ongoing trade negotiations with Japan and the EU.
The end of the 90 days of US/China negotiations: Following mid-level talks in Beijing, it has been widely reported, though not confirmed, that Liu He, China’s top trade negotiator, will “most likely” visit the US in late January. We believe Beijing will be eager to secure a deal should Liu’s visit go ahead. If an agreement cannot be reached before the 1 March, US tariffs will increase from 10% to 25% on the most recent tranche targeting $200bn in Chinese imports, as planned.
1 March – Debt limit suspension ends: Without action from Congress the Treasury Department will again need to resort to so-called “extraordinary measures” to avoid breaching the limit. These measures typically involve a combination of issuance, reinvestment and investment suspensions in an effort to extend operations (see US: Upcoming Fiscal Deadlines and their Implications). Markets have reacted to the debt ceiling negotiations before. With continued friction on fiscal issues in Washington it’s possible markets may follow a similar pattern of cheapening T-bills that expire around the estimated time of the debt limit’s “X-date” said to be around “mid-summer”
PBoC Policy Easing: We expect more proactive fiscal policies and more monetary easing in 2019. The People’s Bank of China delivered a 100bp blanket reserve requirement ratio (RRR) cut in January, with 50bp effective 15 January and another 50bp on 25 January. However, this will not be enough to shore up the economy, in our view, and we expect an aggressive ramp-up of easing/stimulus measures in Q2 when growth slows significantly. We expect three game-changing policies this year: 1) bigger and more expansive value-added and corporate income tax cuts 2) more RMB depreciation to mitigate downside pressures on export and growth; and most importantly, 3) deregulating property markets in large cities.
European Parliament election: As the electoral campaign is about to start, the European Parliament election race is going to get increasing market attention. The most important shift since the 2014 election has been a rise in Eurosceptic sentiment and the rise of populism more generally, with anti-EU parties have come to power in a number of EU member states. 2019’s European Parliamentary elections provide a battlefield for pro- and anti-EU parties to go head-to-head across Europe, and could trigger a new era in European politics. The European Parliament’s members are directly elected by citizens from across the European Union every five years. A change in the existing balance of power could affect the EU’s policies, its budget and who ends up getting the top jobs in various EU institutions, including the European Commission and the ECB.
Read the full Risk Radar here.
FX Strategist, EMEA