Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Chief Macro Strategist
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Week ahead and market risks
Christopher Dembik
Head of Macroeconomic Research
Summary: Weak Chinese data and Saudi Arabia oil attack have put an abrupt end to the equity rally. More risks are popping up this week that could have a negative impact on the market and increase volatility.
9/16/2019 – British PM Johnson meets Juncker for Brexit talks.
We don’t expect much from this meeting. Our central scenario is that snap elections will be announced very soon, which would postpone Brexit deadline once again. We don’t think a second Brexit referendum would bring more clarity, as the British population is still very divided over the issue (chart below).
We acknowledge the risk of Brexit accident remains elevated, but it could lead to positive unexpected outcome in other European countries. Indeed, based on the latest debates in Germany’s Bundestag, it seems that a technical recession is not enough to trigger a fiscal stimulus package in Germany, but a hard Brexit could certainly change the mind of the German government. The only pending question is to know whether it will be too late to implement a counter-cyclical policy.
9/18/2019 – FOMC meeting
The latest US macro data are quite good, but the motivation to lower rates (25bps already priced in) will be linked to external factors e.g. trade war but more importantly tightened financial conditions at the global level due to US shortage. The growing risk is that the Fed pauses after this rate cut, which could be clearly negative for the market. We will focus on the FOMC meeting a bit longer tomorrow in another short note.
9/19/2019 – Washington can move ahead with F-16 sale to Taiwan
The Trump administration could technically move forward with the sale of F-16 fighters to Taiwan, worth an estimated $8 billion. This move is widely embraced by the US Congress with support from both main parties. If the administration goes ahead with the sale, it will certainly infuriate China. In our view, it is unlikely that the sale will go on in the coming weeks, as it could seriously jeopardize US-China trade negotiations that will take place in October. However, it is quite certain that the F-16 sale will be part of the negotiations and could be used as powerful lever for action by the US administration to obtain concessions from the Chinese counterpart.
9/20/2019 – Germany’s government unveils climate change policy package.
This is mostly a crucial test of credibility for Merkel. Over the past months, her government has proclaimed it will unveil a significant climate change policy package to cut greenhouse gas emissions by 55% by 2030 compared with 1990. There have been many questions about how to do so. If Merkel underdelivers, it could constitute another setback for the Chancellor, and it could further weaken her position within the coalition.
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