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This Is an Incredibly Difficult Environment for Investors

This Is an Incredibly Difficult Environment for Investors

By    |   Monday, 24 October 2016 07:30 AM

The dollar's rise against the euro is again attracting attention.

The 10-year yield differential between U.S. and German 10-year government paper at 174 basis points (bp), (as compared to 154 bp in early July, which is close to its widest the gap since early 2014), predicts a weaker euro ahead.

That gap is wider than the summer of 1999, when the euro was priced a couple of points below $1.10 line, or near its level today, or just before the euro began its collapse toward the absolute low of US$0.8225 per euro in October 2000.

When ECB President Mario Draghi last week gave a clear hint that at the December 8 meeting a policy shift would be announced, we saw a non-negligible weakening of the euro against the dollar, a situation that was amplified by the growing likelihood that the FOMC will hike the fed funds rate on December 14 when the Fed chair will also have her press conference and we will get the Fed's latest economic projections.

Meanwhile, Europe has once again serious hurdles, of which the constitutional referendum that will be held in Italy on December 4 is the most important one. So far, the no-vote seems to be on the winning side and if that would be the case, Prime Minister Renzi is likely to respect his promise to resign if he loses the referendum, which could lead to another elections turmoil in Italy.

Besides that, the Comprehensive Economic and Trade Agreement (CETA) between Canada and European Union (EU) is at serious risk of not being formally signed this week in Brussels. Belgium’s regional government of Wallonia still opposes the CETA agreement and has the legal power to do so. We’ll have to wait and see of the regional government of Wallonia changes its stand. The negative consequences, if this scenario should happen, are still extremely difficult to calculate.

Elsewhere, a former central banker at the Bank of England, Paul Fisher,  has suggested the next financial crises might be triggered by climate change. “It is potentially a systemic risk … A sudden repricing of assets as a result of climate change could be the trigger for the next financial crisis … You don’t need to believe in climate change, you don’t need to believe that it is man-made, you just need to believe that governments are going to do stuff and that is going to affect your business. And then it is a material risk,” he said. 

Finally, inflation also is back on the global agenda. Any increase in food prices, as a consequence of climate change, will fuel social tensions and produce unwise political responses, generally of a protectionist nature.

Singapore has also joined the list of countries witnessing rising price pressures. In Singapore’s case, we have seen reduced deflation pressures as food prices there rose 2.2 percent on the year in September.

The overall risks for the global economy remain tilted to the downside. This is an incredibly difficult environment for people who want to invest.  

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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The overall risks for the global economy, over the short to median term remain tilted to the downside.
invest, dollar, euro, difficult
Monday, 24 October 2016 07:30 AM
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