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]