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Investors Should Be Thankful for Insights From G-20, Fed

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Monday, 26 November 2018 10:06 AM Current | Bio | Archive

For investors, there are two main events this week.

First on Wednesday, we’ll see what Federal Reserve Chairman Jerome Powell will tell us about the U.S. economy and “hopefully” how he sees central-bank policy in 2019, and then

At the end of the week, on the sidelines of the G-20 meeting in Buenos Aires, when President Trump and China’s President Xi meet, we’ll see whether they can provide a venue for China and the U.S. to take steps toward resolving “some” of their trade issues.

Depending on how both events turn out, they could have important impacts on the markets.

Italy’s Budget Deficit

In the meantime, the Italian government is apparently prepared to consider a “smaller” budget deficit target by “replacing” spending with investment. Italy’s Deputy Prime Minister Salvini suggested a 2.0 percent of budget deficit would be just as good as a 2.4 percent budget deficit if it were to engineer growth.

The problem is that economic data is not that precise and economic forecasts are certainly not that precise. The idea that an economist can accurately forecast a deficit change of 0.4 percent of GDP is ridiculous. Economists generally consider themselves to have got their forecast right if the number before the decimal point is right. What happens after the decimal point is just guesswork.

This all goes to underscore the fact that this process, indeed the whole European fiscal stability rules’ structure is about politics and not about economics.

This is important for investors for keeping in mind when considering euro-related investments over the median to longer term.

Nonetheless, the political signal of willingness to change, or more accurately to use a statistical “sleight of hand” to pretend to change may raise market “hopes” that the political process of the excessive deficit procedure might be delayed.

Brexit Saga Is Not Over Yet

There was more politics over the weekend in Brussels with the 27 remaining members of the European Union rubber-stamping a divorce agreement with the UK.

However, it was never going to be the vote of these 27 that was likely to be an obstacle to the process. The question is whether the deal will get through the UK Parliament.

At the moment, the “arithmetic” of this does not look terribly promising.

The European Union does seem to be trying to head off the idea of a second vote after some re-negotiation. That view has actually become more consensus in the market of late.

Investors, at least for the moment, who have or intend to have British pounds in some form or another in or related to their investments, remaining on the sidelines and wait and see how the British Parliament will vote could be not such a bad idea.

Uncertainty, and therefore risk, is too big.

Russia and Ukrainian Tensions on the Rise

Politics is also playing something of a role elsewhere in markets with rising tensions between Russia and the Ukraine. Russian naval ships firing on Ukrainian ships over the weekend and the UN Security Council meeting later today.

At the margin, this might raise concerns about the state of Russian relations with NATO and through that some market focus on sanctions.

However, this is unlikely to be a significant market focus overall as things stand as there is little direct impact on either economics or asset prices.

German IFO Business Climate Index Weakens Further

Today we got the IFO Business Climate Index survey for Germany, which is a very reliable survey, which fell to a four-month low of 102.0 in November 2018 from an upwardly revised 102.9 in October and below market expectations of 102.3. Sentiment among German businesses weakened further this month. Companies scaled back their assessments of the current business situation albeit from a high level. Their business expectations also clouded over. Together with other indicators, these results point to 0.3 percent economic growth in the fourth quarter at most.

Investors could do well keeping in mind that the German economy, which is the first economy of the European Union, continues to cool down, which is not supportive for the euro.

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

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Investors Should Be Thankful for Insights From G-20, Fed
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Monday, 26 November 2018 10:06 AM
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