As we approach the homestretch and start to focus on 2017, global economies will be confronted by numerous challenges and uncertainties. As the world’s largest economy, the US will not only be adjusting expectations and realizations for the next four years based on who will be occupying the White House but also whether the Federal Reserve will finally have the will to pull the trigger and restart its initial feeble attempt which began almost a year ago to normalize interest rates. Many issues will remain on the table after Election Day. As much as Hillary Clinton appears to be in the lead to win the Presidential elections, recent revelations courtesy of WikiLeaks tell a confusing tale as to which HRC will be running this country. In addition, Wall Street is extremely fearful of Donald Trump winning, especially because of his very vocal opposition to existing treaties on trade and his open complaints about Janet Yellen and the Federal Reserve.
As for Europe, the show has barely begun regarding Brexit, yet a business reporter yesterday made the offhand comment that the British Sterling is already trading like an emerging market currency in its volatility. Although Britain has yet to invoke Article 50 in a formal request to Brussels to exit the European Union, no one on either side has wasted much time in posturing. As we pointed out in our previous mid-year global overview, a handful of some of the more important EU nations will be facing major elections next year. Since immigration will likely be a main issue in these elections, current political sentiment suggests that these nations will swing right.
With Brexit and the likelihood that it will be messy, and with elections, which likely will have immigration as the main contentious issue, we believe that volatility will be the name of the game for financial markets.
As for Japan, there appears to be a bit of an impasse between Kuroda at the Bank of Japan and PM Abe. Clearly Abe’s much touted economic “arrows” have not worked and the idea of using “helicopter” money was considered and quickly dropped. We have always considered the adoption of negative interest rates as a policy adopted in desperation and is exceedingly dangerous because of its ultimate unintended consequences. Of course, not only Japan but the EU is utilizing this last resort desperate measure.
Skeptics on China believe they have found red meat in China’s most recent export data. China’s exports in September in USD terms fell 10% YoY. The weakness for the month can be traced to weak external demand but also due to some short term domestic factors. We are aware that Beijing is making a concerted effort to promote domestic consumption and on that score retail sales in China are still growing in excess of 10% on a consistent basis.
This is not to say that the Chinese economy is not confronted by issues. The main challenge for Beijing going forward is the strength of the dollar. This is particularly relevant if the FOMC raises rates before year end. However, it should be noted that an increase in the value of the dollar due to the raising of US interest rates will negatively affect all currencies, not just the yuan. So therefore on a relative basis, the impact should be much softer and should not lead to a global currency crisis.