ref :- "Brace for the World Economy's Most Important Week of the Year" , Bloomberg Markets
We don't yet fully know the level of Russian interference in the US election that ushered Donald J. Trump into the White House. We also don't yet know the level of collusion by senior members of Mr Trump's campaign team -- if indeed there was any in the upper echelons. We can guess what the Russian motives behind any attempt to influence the result might have been. Foremost among them was probably a desire to see anybody other than Hillary Clinton in the top job, such was the antagonism between Russia and the Democratic candidate when she was US Secretary of State. The fact that such a divisive and hot-headed populist as Mr Trump ran for the Republican ticket may just have been a huge bonus.
Whatever the case, Moscow probably can't believe its luck when surveying the damage being wrought on the relations between countries whose alliance we used to refer to as "The West", but these days could just as easily be termed "G7" -- or at least it could until this weekend just gone. People were already referring to "G6 + 1" before the get-together, and as President Trump smashes the old world order and the alliances within it into a thousand pieces the new tag seems ever more appropriate,
As we've said numerous times before in connection with Mr Trump, you really couldn't make it up. He started the summit by suggesting that Russia should be readmitted into a G8 bloc -- Russia was suspended in 2014 as consequence of its actions in Crimea / Ukraine. It was a curious demand, given that the alliance (including the US) is still applying sanctions for those and other misdeeds (in their view) -- Syria, for example. He ended it by backing out of an agreed communique that against the odds they had somehow managed to cobble together, seemingly in a fit of pique with Canada's PM Justin Trudeau in particular. To be frank, few expected anything very constructive to come out of this meeting but we doubt that many had predicted that things would end in such a squabble either.
Mr Trump has headed off to Singapore, where tomorrow he''ll formally start talks with N. Korea's Kim Jong-un. It'll be a one-to-one affair apparently (give or take an interpreter or two), and Mr Trump has said that he'll know "what's what" within first minute. The idea that the world's most complex and dangerous security issue will be in the hands of two of it's largest and most volcanic egos spitballing without the restraints usually imposed by diplomatic aides is one that could fill you with hope or horror, depending on your point of view.
All of which is absolutely fascinating -- in a terrifying kind of way -- but how might it affect economies and markets ? Plainly, both the events in Quebec over the weekend and those to come in Singapore have the capacity to affect things in a major way. With regard to the Trump / Kim talks, think flight-to-quality if things go badly, although we're not sure that there will be enough faith in long-term prospects at this stage to assume that we'll see equally heavy traffic in the opposite direction if things are said to go well.
The G7 debacle increases the possibility of a deeper and more aggressive trade war, something which at its worst would damage global growth, and by extension have significant repercussions for monetary policies and asset prices around the globe. But as we noted last week, as yet investors remain unsure of exactly how this will turn out and are largely sitting on their hands, market-wise. We can understand .... there has always been a suspicion that Mr Trump's highly aggressive posturing is just part of his deal-making strategy. The trouble is, you have to think that now that this has got personal (Trump - v - everyone else) the chances of parties compromising stated positions must be reduced.
Anyway, putting that all to one side (as if one could), this is a very big week indeed for central banks ..... the three largest central banks in the world, in fact :
WEDNESDAY 13th JUNE : The US Federal Reserve makes its monetary policy decision. As is normally the case in these days of "forward guidance", the market is pretty sure that it knows what the Fed will do, and is more concerned with what it will say. As calculated by Fed Funds Futures prices ( see Countdown to FOMC) , there is a 91% probability that the Fed will hike by 25 basis points, the second rise of 2018. The real question is whether the Fed's Open Market Committee will change their expectation of one more hike this year (total of three in 2018) to two more. After its May meeting , the Fed statement included new emphasis on "symmetric" inflation targeting ..... in other words, with a target of 2.0% it could tolerate a rate of 2.2% just as easily as it could 1.8% , say. That was taken as a mildly doveish thing for the Fed to say, and one could argue that having been wrong-footed more than once in the past by stubbornly low inflation data, the Fed could well err on the side of caution. On the other hand, just about every other bit of data is showing robust growth and conditions that SHOULD point to rising inflation further down the line, even if it hasn't manifested itself so far. That's the decision facing the Fed, just as it's been for some time now.
THURSDAY 14th JUNE : It's the turn of the European Central Bank ..... and we know that they are NOT going to hike any rates. But we also know (because ECB Chief Economist Peter Praet told us) that for the first time the ECB will formally discuss the end of their bond-buying programme (Quantitative Easing), currently running at a rate of €30bn per month. It's more than possible that such is the complexity of the issue Mario Draghi will not be able to inform us of their decision with regard to an end-date until after the ECB's July meeting. Favourite is for all purchases to cease by the end of the year (the current arrangement is in place through September). Taking into account the ECB's repeated commitment not to raise rates until sometime after an end to QE, that would mean we might expect the ECB to start nudging rates higher in mid-2109. The ECB's deposit rate is still at -0.4%, and some in Frankfurt and elsewhere will no doubt be thinking "not before time".
FRIDAY 15th JUNE : If it's Friday, it must be the Bank of Japan ..... and this one's pretty straightforward : NO CHANGE .... and with inflation still a long way below where the BoJ would like it to be, a continuation of the vast QE asset-buying programme being conducted by the central bank.
One more thing .... Italian bond yields are lower and the Euro is getting some support after new Finance Minister Giovanni Tria said yesterday that the new government was unanimous in its desire to remain in the eurozone. That's a logical reaction, but the biggest danger to Italy's membership is not so much an overt rejection by any of the new powers-behind-the-throne on matters of principle, it's that the policies put forward by the Five Star and the League parties would simultaneously reduce government income and increase spending. That raises the spectre of Italy breaching eurozone budgetary rules, and that's what represents the biggest threat to euro membership. Mr Tria had comforting things to say about that too, including bringing down Italy's 132% debt-to-GDP ratio. Quite how he's going to do that without getting either Mr Di Maio (5star) or Mr Salvini (lLeague), or both, to row right back on election commitments is unclear and frankly doesn't seem particularly likely if those two want to maintain populist support. The Italy thing has a long way to run ......