- In Europe, Brexit and the Italian budget talks 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. There are five key themes in the markets now:
- Increasing concerns over the world’s economic outlook
- The progress of the US/China trade negotiations
- Brexit and the implications of the 'meaningful vote'
- Central bank policy adopting an increasingly dovish tone
- What the end of global QE and higher yields mean for the world economy and markets.
But beyond those themes, 2019 offers further political risk with at least 14 major elections, a change in the central bank guard and the risk of developments in the Mueller investigation and what the outcome of November's midterm elections mean for US domestic and foreign policy.
In the short term, the market focus will be on the implications of UK's meaningful vote in parliament, the next round of US/China trade talks, the implications of US government shutdown, World Economic Forum in Davos.
Events to watch:
US Government shutdown: If President Trump declares a national emergency the government would likely return to normal operations relatively quickly conditional on a few steps. However, there is still some likelihood of a prolonged shutdown. While we believe Trump is close to making the declaration, pockets of opposition from Congressional Republican who view such an action as an executive branch abuse of power could delay Trump’s action. Regardless of the outcome the partial government shutdown highlights the perils of divided government so far in 2019 and portends future clashes on more important fiscal items such as addressing the debt limit. In addition, the Commerce Department, housing the Census Bureau and BEA, remains without funding, delaying key economic releases.
The US Section 232 investigation deadlines: By 17 February, the Chamber 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 Chamber of Commerce. We expect the Chamber 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.
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