+1 Added to my documents.
Please be aware your selection is temporary depending on your cookies policy.
Remove this selection here

Risk Factors - October 2015

October 2015

RISK LEVEL

FED: A MISUNDERSTOOD MONETARY POLICY

The Fed pre-announced its first interest rate hike: this one should take place at the end of 2015. It is also known that it will proceed in a gradual way, and thus which it will advance with small steps. The clarity of its communications remains the key challenge. The speed of the rate increase will ultimately depend on (1) the reaction of long-term rates, (2) the dollar and (3) the economy’s ability to handle less accommodative monetary conditions … do not underestimate (4) the international context which has forced the Fed to stay on hold at its latest FOMC.

moderate-risk=

EUROZONE: A NEW DEBATE ON QE

The ECB has committed to continuing its QE until September 2016, even if the economy improves dramatically. What would occur if growth, employment and other deflationary pressures were to suddenly disappoint? To decide of an extension of the QE would certainly not be as “simple” as in Japan or the United States. One still has in memory the debates on the adoption of the QE, and the dissensions between Europeans during the last Greek crisis have undoubtedly left traces…

low risk2=

EUROZONE : MISESTIMATION OF ECONOMIC GROWTH (QE EFFECTS)

The euro zone profits from a conjunction of favourable factors: a vast QE, a depreciation of the euro, a fall of oil, softer financial conditions, an improvement of the bank credit… From a market standpoint, the risk is from now on to be a little disappointed by the extent of the recovery. The recovery in business investment, especially, will need watching: it will determine if we are too optimistic… or too pessimistic.

moderate-risk=

GREECE: GROWTH, INTEREST RATES, FISCAL DISCIPLINE AND SOLVENCY

Greece solvency remains a major issue. Despite two bail-out plans (in 2010 and 2012), a debt restructuring and a significant haircut, the country has been unable to contain a sharp increase of its debt, and this problem came back as a major worry in 2015. A third plan of assistance has been adopted last August, moving away once more the scenario from Grexit. A stronger growth, low interest rates ad fiscal and tax discipline are prerequisites for the debt to be contained. Greece is far from respecting these conditions.

moderate-risk=

UNITED KINGDOM: EXITING THE EUROPEAN UNION (BREXIT)

There will be a referendum on the Brexit “by late 2017”, which could open the door to a new referendum on Scotland’s status in the Kingdom (Scotland wants to stay in the EU at all costs). In the polls, there is no clear majority emerging on the Brexit. It is much too early to worry about the potentially negative consequences of a Brexit.

low risk2=

COMMODITIES: LOWER PRICES AND FINANCIAL MARKETS

The fall in the price of commodities has a cleaving effect: it is obviously favourable to the consumer country and prejudicial with the producers, which explains the weakness of some South American countries or the return of the deficits in producers of energy. But it also puts at risk the equity markets, because it reflects a decline in the world demand.

High Risk =

CHINA: A SHARPER ECONOMIC DOWNTURN

China is at a dead end: its economic model seems breathless and the deceleration of the activity is alarming. China’s challenge is to control credit and shadow banking, reduce private debt and NPLs, and return to more solid productivity gains. China has the means to support such a – long – transition, but the stakes, and the task at hand, remain very difficult and potential growth is much lower at this stage. It has been divided by two in roughly 10 years (due to demographic trends and productivity gains). Monetary policy easing will continue. The yuan policy remains crucial for financial markets at this stage.

moderate-risk=

CHINA: A SUDDEN DEPRECIATION OF THE YUAN

China has abandoned during a few days, last August, its FX policy. It gave the sentiment China was preparing financial markets to a vast depreciation of the currency. Apart the very negative – and immediate – impacts on financial markets, it also force to conclude that the usual economic policy (based on monetary policy, fiscal policy, tax policy and income policy) started to be inefficient. A moderate risk, but a scenario with very negative impacts.

moderate-risk-flat

EMERGING ECONOMIES: A MORE PRONOUNCED DECLINE IN GROWTH

Expectations of a rise in Fed’s key rates (in Q4 2015) seem well anchored. Conversely, some countries’ fundamentals are worrisome: a recession in Russia and Brazil, a marked slowdown in China, inflationary pressures in certain countries, close ties with China, decline in commodities prices etc. Nothing seems favourable at the present time. The risk of the downturn accelerating in 2015 for all of the emerging countries intensifies, and it has to be watched very closely.

moderate-risk=

 

Publication (Download)

Article in English

Article en Français

Cross Asset of October 2015 in English

Cross Asset d'Octobre 2015 en Français

ITHURBIDE Philippe , Global Head of Research
Send by e-mail
Risk Factors - October 2015
Was this article helpful?YES
Thank you for your participation.
0 user(s) have answered Yes.