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Risk Factors - September 2015

September 2015

RISK LEVEL

FED: A MISUNDERSTOOD MONETARY POLICY

The Fed pre-announced its first interest rate hike: this one was supposed to take place at the end of 2015, but nothing certain at this stage. It is also known that it will proceed in a gradual way, and thus only advance in 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.

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 it occur if the 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 latest Greek crisis undoubtedly left traces…

low risk2=

EUROZONE : MISESTIMATION OF ECONOMIC GROWTH (QE EFFECTS)

The euro zone profits from a conjunction of favorable 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 returned as a major worry in 2015. A third plan of assistance has just been adopted, 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” (out possibly next year), 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 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 favorable 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 2-4

CHINA: A SHARPER DOWNTURN

China is at a dead end : its economic model seems out of breath 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 was – so far – able to support such a – long – transition, but due to recent events, there is now a cloud of doubt.

moderate-risk=

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 favorable 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=

A BOND CRASH

From a fundamental standpoint, there is no reason to see nominal and real rates rise (weakened potential growth, high unemployment). That said, the relative rarity of German paper and the ECB’s QE will weigh down the rates for the long term. Through the impact of portfolio reallocation, this is expected to prevent long-term rates from continuing to rise, in the United States as well.

low risk2=

 

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Cross Asset of September 2015 in English

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Philippe ITHURBIDE, Global Head of Research, Strategy and Analysis at Amundi
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Risk Factors - September 2015
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