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ECB: ECB communication was quite busy last Friday and during the week end. Messages out of the ECB Board members are in line with our constructive scenario and could be summarised in the three following remarks: 1) ECB is ready to do more stimuli (more QE sovereign and private) BUT it will remain on hold for now until June and September measures impacts are evaluated, 2) ABS credit risk is likely to be taken by governments, this reduces that the EUR-crisis risk (this represents the last hope for EUR-Skeptics to succeed) as a result of an ECB credibility crisis – a subject we’ve stressed in Dec 2011 -, 3) the Hawks – Jens Weidmann – continue to play the “bad cop” role to pressure the EZ member states governments – France and Italy – to pursue the announced reforms. This aims avoiding back tracking under rising domestic conservatism pressure (out of both Left and Right).
Should the government back tracked on the reforms, the EUR stability could be at risk and would give credit to the EUR-skeptics, through a currency crisis – the hope of some hedge fund managers and Extreme Right parties alike – or a political crisis – out of the new critics of fiscal transfer risk -. By showing responsibility in implementing reforms, the fiscal transfer risk r reduces and therefore the solidity of the union increases. The political support for the EU is likely to increase as the EU Commission (EC) undertake investment projects and more integration initiate (these create jobs and stimulate growth – see comments on G20-)
BoE: as we were indicating for some time, BoE would take the Scot-exit (as well as Br-exit) seriously when considering interest rates normalisation. While we do agree that No vote has lowered a GBP crisis, the BoE is likely to remain cautious while wage inflation remains subdued (for structural factors). The change in the narrative likely to push GBP higher, which would help the BoE to use the below 2% inflation target as a way to stay on hold.
EM Central Banks: G-20 Finance Ministers and Central Banks meeting has indicated more collaborative functioning. We interpret this as a hint that the Fed, and developed world (DM) central banks, will be cautious and coordinate their actions when exiting the longest monetary stimuli. The Fed is likely to keep the threat of an early normalisation to avoid additional systemic risk to build, while the countries undertake reforms (to improve the inter-temporal solvency and avoid the doom and gloom scenario). As we have indicated in our recent researches, it’s better to be “ a vigilantes writer while be a constructive investor in these circumstances). Furthermore, we consider that the markets are underpricing the EUR and RMB reserve status acquisition, while are over bullish USD.
G-20 November 2014 : November G-20 summit is likely to clear the way for: 1) reducing tax avoidance (implementation of OECD initiatives for better private sector and individuals tax governance), 2) implement fiscal stimuli through infrastructure investments (education, digital) and 3) pressure countries to undertake structural reforms, while new technologies are providing a unique opportunity to deal with a financial crisis, which has been as severe as the 1929 crash, without experiencing a War. We have been worry of the rise of populism as a by-product to the financial and economic crisis in same fashion Nazism built support as a consequence of the economic crisis in the 1930s. The XXI fascism (i.e. terrorists) can only be defeated by a governance improvement which will reduce the risk of mistrust. This mistrust is currently used as justification for youth to join jihadists and extremists – G-20 finance minister and CB meeting open the door to Russia to avoid isolation. It is up to Russia to reduce its belligerency and the West to accept Crimea and some of Eastern Ukraine regions self proclaimed independence to reduce the isolation risk. We do believe that neither side is ready to accept jeopardising international laws which could have importante consequences for the other “disputed regions”. We remain very pessimistic that Russia will be eagle to avoid a full fledge isolation vis-a-vis Western countries, however we consider that EM countries will help to create an economic and trade back-door in the medium term to avoid a commodity crisis.
World Bank exerted pressure to push more coordination in fighting Ebola. Through fighting the outbreak, the global community can also help Africa emergence. We have been forecasting that medium term Africa might bring a global growth boost as important as that of China entering WTO (in 2001) should Africa countries undertake better governance, while US, EU, and China are seeing an increase in investment in the continent. Africa governance improvement is likely to take place as soon as Western countries governance improvement initiative (e.g. OECD tax avoidance) is undertaken.
Ebola: As the global community recognises that defeating mistrust will be instrumental in the war against terror (this reduces the jihadists argument which found traction vis-a-vis many western youth), and Ebola spread (cf. riot against educators), global coordination is intensifying to: 1) fight disinformation (we were talking about it in our recent daily briefings), 2) provide short term medical assistance (France, US, Israel, etc.) with the help of military expertise and 3) provide financial support (wealthy donors, government funding, NGO help etc.). We do believe that the most important single risk remains the use of Ebola as a dirty weapon. But, should such an action take place financiers of terrors are likely to come to the spot light. Financiers should make no mistake, this time around, unlike in 2001, there are sufficient data to bring to justice more than just those who execute acts of terror.
Gaza: As Egypt President el-Sisi is intensifying the fight against the Muslim Brotherhoods, the political arm of the radical islam fighters (whose fighters include the hard-core liners ISIL and Al Qaeda), Egypt is re-gaining its leading role in the Palestinian – Israeli peace process. The pressure to reduce Israel’s defence budget aims bringing the hawks to consider peace solutions. We are very optimistic (as we have been since the beginning of the Gaza crisis) that : 1) Hamas leadership will break from extremists and will recognise Israel – as Fatah did years ago – (though some radical fractions are already burgeoning with much less financial and arm support), 2) Iran will be instrumental in settling a long-term peace process (as the nuclear negotiation heads toward a civil nuclear Iran), 3) a LT peace process will help the development of Mediterranean sea gas exploitation (as it enables to return to the Israeli – Turkish normalisation, a process which was very close in April but has been postponed by the Gaza crisis).
Iraq: the global community military action is starting to yield results :French strike of ISIL logistics depots and gain bi-partisan supports in every country (incl. Arab countries). The most single positive development comes from the recognition of Iran’s support to the fight against the terrorist organisation (we were discussing this hypothesis in our previous daily briefings). This is having an impact on oil prices. Indeed, oil prices continue to behave as we were forecasting in our recent energy update note. However, the situation on the ground continue to be fragile. The release of 49 Turkish civilians could have been in exchange of ransom payment or Turkey’s offer to accept Muslim Brotherhood organisation which has been expelled from Qatar (please see our previous briefings). In the latest case, this would mean that Turkey is genuinely heading to create some form of political Islam, which would ressemble moderate christian political groups (e.g. CSU). We are not there yet. Turkey could delay the fight against radical islam should the west miscalculate the geopolitical game against Russia. The West should recognise that Russia continue to enjoy a wide support within the muslim world and only a change in the narrative of West can help change the centroid of Arab populations support. This is likely to come along the fight against mistrust as the global governance improves.
Russia: US, Canadian warplanes intercept of Russian fighter jets in airspace near Alaska seems to be a title of an article dated before the break of the USSR. This does not come to us as a surprise, though the Ukrainian situation seems to be calming down (BUT NOT deescalating). The Eastern Ukraine region self proclaimed republics continue to be the name of the game, because too much autonomy (the current self proclaimed government are calling for a full fledge independence – which could give legitimacy to Crimea annexation-) would make Ukraine IMF program dead born (as Kiev government would be in the incapacity to deliver on governance improvement and structural reforms). At the other end, an autonomous regions which would bind by the IMF program reform will increase the ability of Kiev government to strengthen the Ukrainian economy along with the governance improvement. Thus, it would increase the likelihood of joining NATO. Russia is unlikely to let this scenario take place without a fight. Therefore, the Kremlin is putting a lot of emphasis on how badly an isolated Russia would impact the global economy, while the Russian economy is preparing for this outcome (e.g. Russian corporations are considering spinning of their US subsidiaries, Wealth Fund is considered to be used to self-finance needed infrastructure investment, while international experts are rushing to find financial solutions for the New Russia political strategy). From the political spectrum, the opposition is organising itself should oil prices drop sustainably below $75bbl – this scenario is possible should the geopolitical blue sky scenario take place -. But the Kremlin is “threatening” oligarchs to keep them away from joining the opposition.
US News: We were indicating in our Friday daily briefing that some signs are showing that the tied is turning on whether the GOP will get the Senate majority in the Mid-Term elections. Our preliminary models (we are currently working on a detailed report on the mater) indicate that the result is too close to call but is learning toward a status quo (Dem. keeping the majority in the Senate). The recent push for Women along with the NFL story is showing that using “War against women” could help the Dem. Furthermore, by ruling for Chad Taylor, the Supreme Court has increased the chance for Dem to keep a state seat which was consider till now to be a toss-up.
President Obama openness to meet President Rouhani along with Secretary of State Kerry comments on the Iran help in the fight against ISIL are both strong anecdotal evidences that the negotiations are heading toward the right direction (in line with our views expressed in the recent research papers).
The Climate Change march should be read as a global commitment to push for better resources usage, as the Ebola fight and US, EU, China investment commitment will increase Africa prosperity. UN statistics (please see Hans Rosling exceptional work on this matter) indicate that with 9bn humain in 2050, we might consume 30% less energy should the global community undertake genuine actions to rebalance energy (China, US and EU are already showing some support to this strategy).
The recent terrorists threats to the US (spread in terrorists and terrorists supporters internet networks) is taking seriously after two men were able to scramble over the White House fence.
Europe News: Chatters have been active speculating on a Catalonia independence. We have been considering that this risk would have been much higher should Scotland have voted for independence. We do believe that the current hype aims getting some devolution to Catalonia from Madrid rather a full fledge independence from Spain. This has no legal or constitutional backing. Separatists movements in Europe have gained traction thanks to the support of the Russian media and the young voters which suffer the most from the economic crisis. We consider that these risks are very low relative to markets perception, because analysts have not factored in the change in the EU narrative and the prospect of support for reforms in France and Italy, which clears the route for more integration and more investments.
Nicolas Sarkozy came back to politics (seeking the presidency of the Center Right party) is likely to shift the opposition away from Front National (extreme right / EUR skeptics) to bringing it back to the Republican center right (please see our live blogging of Fmr. President Sarkozy interview with France 2 – Sunday 21 night).
Moreover, Pope Francis comments in Albania show a clear path toward a coordinated religious leaders support to multi confessional acceptance (please see Saudi Mufti and Iran Ayatollah fight against ISIL and terrorists) which would reduce the risk of a full fledge XXI croisades (a scenario many investors are still playing in the hope of a genuine terror which could create inter confessional wars).
China: Short term interest rates eased showing that liquidity is sufficient to avoid a hard landing, while China undertake structural reforms and governance improvement. China President XI 4-nation visit hinted that the Chinese government is accelerating its path toward making RMB international currency and use the infrastructure investing know-how in other countries. Furthermore, Chinese troop withdrawal from Indian territory indicates that, although China is increasing its military dominance, it has no objective to attack its neighbour while undertaking important reforms.
Australia: In addition to the news reported previously on G20 weekend meeting, the most important stories focused on Climate Change. The Environmentalists have been quite supportive to the mistrust campaign in order to push the global community to speed up actions in order to bring the consumption of resources to levels which are sustainable with dioxyde emissions. Fortunately, the technology and energy efficiency approach enables to keep the growth while reducing the human climate impact (please see Rans Hosling on this matter and our research note “from 1114 to 1125”)
New Zealand: as we were expecting in our recent notes and daily briefing, National Party secured a 3rd term, without the need of a coalition. This is positive for NZ to avoid any additional debate regarding the collaboration with Asian countries. We see this win to clear the way for rebalancing NZ economy toward more agriculture technology investment. The result does support our constructive scenario on NZ.
Japan: Recent news flow indicate that Japan is heading toward improving its relations with neighbours. We have been forecasting that Japan will apology for confort Women in order to clear the tension build since the end of WW-II. The recent government economic downgrade was widely expected. We see BoJ to keep the bazooka of QQE-2 un-tested until the JPY excessive depreciation and JGB solvency risk came down * investors are still short JGB expecting a Japan crisis *. However, BoJ might do some adjustment to its monetary program but nothing excessive. The news flow out of this weekend G20 meeting shows that the global community is gently pressing the government and the BoJ to pursue structural reforms, economic rebalancing, solvency improvement (through VAT 2nd hike commitment) and adequate monetary policy (not too hot – to avoid a crisis – not too cool – to avoid derailing the on-going portfolio rebalancing approach -).