210 (41-50)
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The political calendar is filled with risk events over the next year. The US elections in a few weeks are likely to yield a Clinton win and continued gridlock. Spain continues without a government, but an end to the impasse could be nearing. In Italy, however, the risk is rising that December’s Senate referendum will be rejected. In this case, new elections, though unlikely, cannot be ruled out. Anti-EU parties might also make gains in next year’s German and French elections. In the UK, the government’s hard-line rhetoric and an uncompromising EU stance are paving the way for a hard Brexit. On the macro front, global growth remains sluggish, although there have been some signs of improvement. US growth is expected to pick up slightly but the eurozone is yet to feel the full impact of Brexit. Importantly, political headwinds prevent necessary structural reforms and limit meaningful fiscal stimulus programmes. Meanwhile, there has been a chorus of calls for such responses from central bankers, as incremental monetary easing is increasingly seen as less effective and even counterproductive. We expect the ECB to extend its QE programme this year, but the Fed is eager to raise rates before year-end, and the BoJ has taken measures to stem the decline in long-end yields. The ongoing policy rethink informs our market views. The sell-off in rates should be sustained, and possibly extended next year. In FX, we are bullish the yen and the dollar post election, and bearish the euro and sterling. We are cautious on US and European equities. EM assets have performed well on the back of material inflows, but we expect a short-term pause in these dynamics ahead of key risk events. David Folkerts-Landau, Group Chief Economist Key pages this month: P6 Global growth sluggish but momentum has picked upP10 Monetary policy rethinkP14-16 US election, Brexit, European politicsP18 Recent market drivers [more]
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The US election will see a polarised electorate choose between two sharply contrasting worldviews. Democratic candidate Hillary Clinton is likely to follow a similar policy agenda to that of the Obama administration, while Republican candidate Donald Trump has promised radical change. Clinton remains favoured to win, but a Trump victory cannot be excluded. Clinton and Trump have both emphasised fiscal stimulus and opposed tax inversions, but their policy proposals have little else in common. Policy implementation will depend on the outcome of the Congressional elections. A divided government remains most likely, implying continued gridlock. The election’s economic impact will be felt mainly through fiscal policy. Trump’s plan could be more stimulative as it is more ambitious, but the accompanying tax cuts are expected to cause a large increase in public debt.Leading up to the election, market volatility should rise, and a correction in risk assets is possible. The dollar should advance more strongly in the short term if Clinton wins, except relative to certain EM currencies such as the Mexican Peso. Equities are expected to rally post-election as uncertainty is removed. In rates, initial steepening on fiscal stimulus hopes should give way to re-flattening in the long run, with the yield curve biased higher and steeper in case of a Trump victory. Trump’s proposal of a repatriation tax holiday could provide a substantial boost to IG credit, but the impact on HY will likely be muted. Key pages: P4 A changing and dissatisfied US populationp5 Negative views of globalisation are a key themep8 Possible political scenariosp9 Comparing the candidates’ policy proposalsp13 Market implications of the election [more]
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In this one-page Infographic we look at the intensifying debate about the limits of monetary policy and its implications. With monetary accommodation increasingly under scrutiny, focus is shifting to the current policy mix. But do not expect a swift paradigm shift: with other levers not delivering much, monetary policy is unlikely to significantly reverse course any time soon. For a broader discussion of our overall macro and markets views read The House View: Waiting impatiently, 7-Sep-2016. [more]
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After kicking off with the surprise Brexit vote, the summer proved unexpectedly quiet. Risk assets enjoyed a strong rally, as investors recognised that the Brexit negotiation process would be drawn out and that the initial fallout was less severe than feared. But amid this resiliency, there is a sense that markets are waiting impatiently as various macro risks loom on the horizon. We divide this month’s publication into four sections that present our views on the key storylines through year-end. First on the macro front, global growth looks set to be the slowest post-crisis in 2016, before picking up modestly in 2017 as EM growth recovers. Looking then at monetary policy, the global stance remains firmly dovish but we do not expect significant further easing from the ECB and BoJ. As for the Fed, we expect a single hike this year, likely in December. We touch on several key themes for markets into year-end: the debate around the shift away from monetary easing to other forms of support; the implications for trade from the undercurrent of anti-globalisation sentiment; the outlook for Brexit and the US presidential election; and the nexus of weak growth, political uncertainty and ailing banks in Italy. This backdrop of sluggish growth and numerous macro risks leaves us cautious on risk assets into year-end, with no upside for US and European equities. Rates should remain range-bound near recent lows, which should continue to benefit EM despite shaky fundamentals. We expect recent FX themes to persist: stronger dollar and yen, lower euro, and sterling to stay weak. David Folkerts-Landau, Group Chief EconomistKey pages this month: p16: Outlook for Fed rate hikesp21-22: A policy rethink? Pivot away from monetary policyp24: Brexit: A prolonged period of uncertaintyp25: US election previewp26: Italy: mired by slow growth, political uncertainty and ailing banks You can access a two-page update of Deutsche Bank Research's views on global macro, monetary policy and markets, as [more]
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Over the past month markets have digested the fallout from the surprise Brexit vote. After global equities initially experienced a steep selloff and sovereign bond yields plunged to record lows, markets staged a strong comeback in recent weeks. While the initial news about Brexit has been absorbed reasonably well, uncertainty will linger. It will be months before formal negotiations start and several years until we know the details of the new EU-UK relationship. In the meantime, there are a number of potential contagion channels. Most notably, pronounced stress in European banks could weigh on credit creation and derail eurozone growth. Against this backdrop, our global growth outlook has been downgraded since earlier this year. Brexit has led to only modest downward revisions outside the UK and eurozone, but it has added to downside risks. Despite better data recently, US growth is expected to remain modest and China should continue to slow gradually. Given uninspiring global growth prospects, three of the major four developed market central banks – ECB, Bank of England, and Bank of Japan – are expected to ease in the coming months. On the other hand, the Fed should renew its divergence from other central banks by raising rates later this year. The magnitude of the recent rally has left us cautious on equities, amid an uncertain outlook for the key drivers of the more positive risk tone. After recent fluctuations, there is some scope for US rates to move lower into year-end, while European rates should remain near current levels. In FX, we remain bullish on the dollar and the yen, and expect further weakness in the euro, yuan and especially sterling. David Folkerts-Landau, Group Chief Economist Key pages this month: p11: Prospects for a workable compromise for UK-EUp13: Potential for contagion from European political riskp15: Risks from EU bank stress p23: Central bank outlookp28: Drivers of recent market rally [more]