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Shrewd Investors Should Beware Data Swayed by Political Risk

Shrewd Investors Should Beware Data Swayed by Political Risk

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Tuesday, 31 October 2017 06:51 AM Current | Bio | Archive

The Trump-Russia inquiry heated up yesterday with three key aides indicted.

Ex-adviser George Papadopoulos pleaded guilty over Kremlin contacts. Paul Manafort and Rick Gates pleaded not guilty to money laundering and fraud.

After the indictment of Manafort and Gates was revealed, Trump tweeted: “Sorry, but this is years ago, before Paul Manafort was part of the Trump campaign. But why aren’t Crooked Hillary & the Dems the focus?????” The president added: “...Also, there is NO COLLUSION!”

Whether this is enough to matter to the markets depends in my view on 3 outcomes:

  • The extent to which accusations against the Trump campaign undermine the President’s authority in Congress. The President does not have that much authority in Congress, so this is perhaps a moot point.
  • The extent to which Congressional time is diverted from issues like tax reform to focus on the Russian affair.
  • The extent to which the electorate takes notice and impacts to mobilize ahead of the November 2018 mid-term elections.

The latest revelations, more than a year ahead of the mid-term elections are probably too early to be directly relevant. However, investors should keep in mind that this is only the start of the investigation and additional risks may transpire.

Meanwhile, the Bank of Japan (BoJ) did what it is so extremely good at, namely “nothing”. The BOJ opted to keep its ultra-loose monetary regime intact, but cut its inflation outlook for the current fiscal year, which ends next March, to 0.8 percent from an earlier forecast of 1.1 percent. The BoJ expects growth to expand at a 1.9 percent pace, up slightly from July, but to slow to 1.4 percent in the coming year and to 0.7 percent in fiscal 2019.

This has relevance only because the Bank of Japan stands out as failing to offer tightening in a world where the central banks of the world’s major economies are moving practically in a simultaneous way into their respective tightening cycles.

Inactivity by the Bank of Japan was not a surprise to investors. Investors have become rather used to the endless inactivity from the Bank of Japan and markets remained unmoved.

In Spain, the Catalan crisis, which is still largely political rather than economic has continued to play out with the former Catalan leader apparently having fled to Brussels, Belgium as the Spanish government has taken direct control.

For getting a real sense of whether the crisis will drag on, the focus will now be on the 2017 Catalan regional election that will be held on Thursday, 21 December 2017. All 135 seats in the Parliament will be up for election. The election was called by the Spanish Prime Minister after invoking Article 155 of the Spanish Constitution of 1978 and declaring the entire Catalan government removed from office.

In the meantime, there is economic data to get excited about.

Eurostat, the statistical office of the European Union, just released its flash estimate for the Euro area annual inflation that is expected to be 1.4 percent in October 2017, down from 1.5 percent in September 2017.

Interestingly, Germany’s consumer price inflation yesterday was surprisingly low in October as it came in at 1.6 percent. The flash HICP fell 0.1 percent on the month to reduce its yearly rate from 1.8 percent to just 1.5 percent.

At a time when most inflation figures are subject to quirks and calculation, getting too excited about one decline would be unwise, but Germany's and EU's declines were undoubtfully high-profile declines.

The United States offers consumer confidence data, which is not especially reliable under normal circumstances. Complications this time around include the impact of storms and wildfires on the data.

In the future, political risk may add uncertainty to the numbers, which could take many investors by surprise and therefore they could do well keeping an eye on it.

People with strong political views in a polarized political system do have a tendency to answer surveys in accordance with their party’s position rather than reflecting their own economic realities.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Political risk may add uncertainty to the numbers, which could take many investors by surprise and therefore they could do well keeping an eye on it.
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2017-51-31
Tuesday, 31 October 2017 06:51 AM
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