Hello Everyone, its been a while since i posted my last blog in 2015. Lets take a pause and look back and what happened during this period which had an overarching effect on the world in terms of Politics and Economics.
In my opinion there were several prominent disruptions which happened during the last few quarters which were totally unexpected thus leading to uncertainty for the World Economy:
- Brexit – It was never meant to happen, Europeans were at least optimistic about it. They thought inspite of the rhetoric’s the majoritarian view would be in favour of remaining in the European Union. Factors from immigration to job stagnation weighed higher in the minds of the working class Brits than the concept of a united Europe. The results surprised most analysts who had bet otherwise. Britain decided to leave the European Union. This would mean the Financial Capital London to come out of the EU purview which sent shock waves across Financial Markets. The situation has stabilised to an extent but the uncertainty about the future of London looms. The present PM Ms. Theresa May has made her resolve clear, for a clean Brexit. The end result could be very different from it, we need to wait and watch.
- Donald Trump Election : This was an upset which the media would remember for a long long time, after all they collectively failed to predict this. The resent of the working class and large sections of society who were untouched by benefits of globalisation made it possible. The consequences of the victory are also largely unclear so far but one thing is certain, it would give sleepless nights to many world leaders and also to a large section of the Financial Markets around the world in the coming weeks & months.
- Rise of Nationalism in Europe: The above two factors had a domino effect on several countries in Europe, starting from The Netherlands in the North to Italy in the South. Europeans would perhaps for the first time see so many Nationalist drenched politicians occupying offices in several countries. This could alter the ever welcoming & embracing Europe for ever in terms of its politics and psyche. The outcome of Italy referendum, French and Austria elections would be things to watch out for in coming weeks & months.
- Opec Production Cut: Finally it happened and everyone is taking a sigh of relief. The Oil dependent EM’s are rejoicing with the hope of price rise so are the US shale producers. The net Oil importers are waiting and hoping for rises within the realm of their capacity but a sudden spike in prices would cause budgets of several nations go haywire.
Lets now take the above factors and see their economic consequences.
- Rise of the Dollar – The election of Donald Trump and the subsequent announcement of Infrastructure spending elated the markets. The election promise of tax cuts and the near certain rise of interest rate by the Fed in December 2016 are like adding fuel to fire. The outcome is The dollar has risen against all major currencies of the world. It has risen more than 40% from its own lows few years back. This naturally has led to a sharp rise in yield of US ten year old bonds and thus would lead to capital flows towards US.The global economy need the reverse.
- Fall of the Single Currency- The uncertainty in Europe with relation to events in France election primaries, Italy referendum , Austria election, Brexit and US election has taken a toll on the Euro currency leading to a fall of more than 10% in November 2016 itself. This may not be totally bad for a region which is battling against low inflation but nevertheless a cause of concern for traders who had bet on Euro gaining vis-a-vis dollar.
- Volatility in Emerging Market Currencies: The rise of Dollar has untold consequences on EM currencies. The Yuan has depreciated to its lowest level in recent years which has made the state anxious and thus forced to come up with slew of capital control measures. India the star of the EM basket is reeling under the Demonetisation decision which would take few months to normalise. Thus affecting the growth and the Rupee vis-a vis the dollar. Other EM’s have their own problems either political or economical.
- Dollar debt servicing: The rise of dollar would make servicing of dollar debt in Emerging Markets difficult. This could have a spiral effect on the macroeconomic scenario of these countries depending on the amount of Sovereign borrowing in Dollar denomination. The exact numbers are difficult to ascertain but it definitely runs into hundreds of billion dollars.
Everyone remotely connected with the markets would be hoping for the year to pass soon having already factored in the last major economic announcement of a Fed rate hike. The global economy is not totally out of the woods and the strengthening dollar along with the other uncertainties would make it stay further in the woods.