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Keeping NAFTA Status Quo Would Be Best for Financial Markets

Keeping NAFTA Status Quo Would Be Best for Financial Markets
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Tuesday, 05 June 2018 07:45 AM Current | Bio | Archive

NAFTA

Perhaps most significant for financial markets was the announcement by the Senate Majority Whip John Cornyn that a new NAFTA deal could not be passed by the current Congress.

There is no new NAFTA deal at hand of course. Indeed, a new NAFTA deal seems a very remote possibility at the moment, but that then leaves the option as being “no change” to the status quo, or exit from NAFTA entirely, or a revised deal being struck under a different Congress after the midterm elections.

Maintaining the status quo would be just fine for financial markets. The structure of the U.S. equity market assumes that the United States is able to participate in a globally integrated and complex trading system. Walking away, or the uncertainty of reforming a deal under a new Congress, may be a little more troubling for markets.

Emerging Markets

Goldman Sachs, Morgan Stanley and Citi, expect that this year we won’t see a re-run of a nightmare scenario in the emerging markets we have seen before.

  • Goldman Sachs says fundamentals in developing markets are mostly intact in wake of the recent stress test from higher U.S. interest rates, a rally in the dollar and jump in oil prices.
  • Morgan Stanley concurs, highlighting that real interest rates are higher, inflation is lower and current-account balances better in most major emerging markets than 2013, though Turkey and Argentina are among the exceptions.
  • Citi also sees them being better equipped to ride through bouts of volatility.

Unlike the time of the taper tantrum in 2013, a majority of the central banks in emerging economies will probably have no need to lift rates in an aggressive and pro-cyclical manner.

Nevertheless, as of late, Indonesia, Turkey and Argentina have been obliged to increase their policy rates rather importantly and abruptly.

The MSCI Emerging Markets Index of equities completed its fourth monthly decline in May, the longest stretch since February 2016, while a gauge that tracks currencies suffered its biggest back-to-back monthly slump since 2016.

That said, Goldman Sachs, Morgan Stanley and Citi agree investors are going to become increasingly selective.

Economic Data in the US and Europe

Besides all that, the just released IHS Markit Composite Eurozone Purchasing Managers Index (PMI), which includes Eurozone services is worth a look at.

The PMI came in at a one-and-a-half year low in May and has now slowed continually since January’s peak to suggest that the region is on course for its worst quarter since 2016. Measured across both manufacturing and services, both new order inflows and expectations regarding future business activity have descended to 18-month lows. 

“The region is on course for its worst quarter since 2016,” said Chris Williamson, chief business economist at IHS Markit. The readings indicate growth of 0.4 percent to 0.5 percent in the second quarter, “but there is much uncertainty as to whether the pace will continue to weaken in coming months.”

All this is important as the European Central Bank (ECB) will have to make the serious decision in the coming weeks and months to stop or to extend its quantitative bond buying program, which, depending on the way it goes will have an impact on for example the euro, which is of course not priced in at present.

In the U.S. the ISM non-manufacturing index for May is also due later today and is expected to come in somewhat stronger than last month.

Italy's Uncertainty

The new Italian Prime Minister Conte faces today votes of confidence in the Senate in the Lower House of the Italian Parliament today. Conte is expected to win these votes of course, although the governing coalition has a very small majority in the Senate.

The interest for financial markets will be in the Prime Minister’s remarks, not in the votes themselves. Markets are looking to get some sense of policy priorities and the fiscal cost of those policy priorities. There will, no doubt, be a clear reiteration that Italy is not going to leave the euro.

There is no doubt whatsoever that uncertainty about Italy continues to play a role and not at least the memory of the Greek crisis.

Nevertheless, the cost of breaking up the monetary union is so horrible that Italy, a country where euro assets are over 3 times euro debt, is very unlikely to want to pursue that course of action.

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

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Nevertheless, the cost of breaking up the monetary union is so horrible that Italy, a country where euro assets are over 3 times euro debt, is very unlikely to want to pursue that course of action.
trump, office, investors, italy, emerging markets
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2018-45-05
Tuesday, 05 June 2018 07:45 AM
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