Weekly Risk Outlook

Weekly Risk Outlook
46 Flares 46 Flares ×

Argentine political parties begin consolidating forces following vote. Energy reports highlight oil trends. U.S. reports could firm Fed interest rate decision. Pacific Alliance makes interest rate decisions. Prime Minister of Japan delivers remarks commemorating World War II. All this in the Weekly Risk Outlook.

Primary Election in Argentina Formalizes Path for Next President

Yesterday, Argentine voters went to the polls to vote in the nation’s primary elections to determine who will succeed term-limited Cristina Fernandez de Kirchner as President of Argentina.

Market-oriented forces had hoped that center-right candidate and Buenos Aires mayor, Mauricio Macri, would be able to forge a strong challenge to the Peronist Kirchnerist Victory Front (FpV) dominance of the Executive that has existed since 2003. However, FpV frontrunner Daniel Scioli secured a significant boost when President Fernandez de Kirchner decided not to support a more leftist challenger to Scioli’s campaign – in part because Scioli selected a strong Kirchner favorite as his running mate – and the party is increasingly united.

The non-Peronist, center-right PRO has suffered recent defeats, including the loss of the governorship of Sante Fe province, as well as an unexpectedly tight race for mayor of Buenos Aires, a PRO stronghold, indicating key weaknesses if the party wishes to win the general election in October or the runoff in November. Although yesterday’s election confirmed Macri’s position as the PRO standard bearer (over CC leader Elisa Carrio and UCR’s Ernesto Sanz), Scioli remains the candidate to beat.

Should polling continue to support Scioli as Argentina’s likely next president, it will be important to watch for any signals that he intends to move beyond the confrontational nature the current administration has taken with the US holdout creditors, which placed Argentina in technical default, or ease some of the more significant government controls over Argentine finance, currency, and commerce – particularly in the export-import field.

Any positive signals would be a boon for investors, who have increasingly held off on engaging with South America’s third-largest economy due to concerns over government interference.

Energy Reports likely to Forecast Continued Low Oil Prices

On Monday, the U.S. Energy Information Administration will release its Drilling Productivity Report, highlighting estimates for oil and gas output from U.S. shale formations. On Tuesday, the Organization for Petroleum Exporting Countries (OPEC) will release its Monthly Oil Market Report on important production trends in Saudi Arabia and Iran. Finally, Wednesday brings the Paris-based International Energy Agency’s monthly Oil Market Report, forecasting supply and demand trends.

Several important legislative initiatives may affect or be effected by significant deviations in current projections that oil prices will remain stable or lower throughout 2015, as the most recent EIA Short Term Energy Outlook suggests.

In September, two major developments will likely have strong ties to global oil developments. First, the U.S. Congress is expected to vote on a resolution of disapproval regarding the recently agreed P5+1 nuclear deal with Iran, which would ease sanctions in exchange for nuclear inspections.

While the notion that a majority exists to disapprove the deal in both houses is hardly in doubt (with Republican majorities in both chambers), the more important question remains whether a 2/3 majority exists in both houses to override President Obama’s certain veto of the bill.

Although key Democrats, including New York Senator Chuck Schumer, have come out against the nuclear deal, supporters are increasingly confident they will maintain sufficient support in at least one of the two houses to sustain the President’s veto.

Opening Iran’s oil production to international markets would likely maintain downward pressure on oil prices, like the announcement of the nuclear deal did three weeks ago, followed by a market correction.

The other major development will be whether the Strategic Petroleum Reserve (SPR) will be used in part to pay for highway funding that is set to expire when Congress returns to session. A quick flood of SPR sales could also lead to a dip in prices.

Cluster of U.S. Economic Reports Could Firm Federal Reserve’s Interest Rate Decision

On Thursday, the Department of Commerce will release retail sales in the United States, with current predictions holding that sales rose in July and that consumers are increasingly confident in the U.S. economy and their relative job security.

This notion of improved confidence will be tested on Friday when the University of Michigan releases its monthly consumer sentiment report. Last month’s consumer confidence index fell to 93.1, below the economist-averaged 94 projection and a fall from 96.1 in June (though the 17th month in a row above 90).

A rebound would suggest improved economic expectations heading into fall, and the potential interest rate hike in September could become increasingly likely as consumers expectations of the U.S. market improve, spending increases, and inflation creeps closer to the 2% desired threshold.

Consistently positive jobs reports have already instilled market concerns of a September interest rate hike. Strong July employment numbers counterintuitively led to a drop in the Dow Jones and S&P for fears that this will contribute to a likelier September interest rate outcome.

Friday will also see reports of U.S. industrial production for July, which have lagged with weak growth in the economies of major U.S. trading partners and an increasingly strong USD.

Pacific Alliance Countries Make Interest Rate Decisions

On Thursday, the central banks of Peru and Chile will issue their interest rate decisions for the month of August, followed on Friday by Colombia’s central bank rate announcement.

Mexico will release its meeting minutes from its July meeting also on Thursday, having decided to maintain interest rates at 3% the day after the Federal Reserve voted to maintain its interest rate at status quo. The Mexican Central Bank is under such pressure from a U.S. rate hike it changed its decision schedule to immediately follow the Fed’s decision.

These countries, which have largely adopted a turn to liberalizing trade barriers and macroeconomic reforms – particularly when compared to their neighbors in Venezuela, Argentina, and Brazil – have nonetheless suffered from occasionally stilted economies predicated on commodities booms gone bust.

Colombia, Peru, and Chile have all worked to maintain some semblance of a status quo in their interest rate decisions (Colombia at 4.5%, Chile 3%, and Peru at 3.25%), but this could be upended by an interest rate boost by the Federal Reserve that has previously made investment in riskier economies comparatively more profitable.

A raise in interest rates by any of these countries (it is unlikely any country would lower interest rates now) could signal a growing desire to head off the effects of a U.S interest rate hike, though they may choose to wait until the Fed makes its decision before moving.

Japanese Prime Minister Commemorates World War II

On Friday, Prime Minister Shinzo Abe is expected to issue a statement in reference to the 70th anniversary of Japan’s surrender to the Allied forces during World War II.

The Chinese and South Korean governments have been adamant that Japan reiterate past apologies (like the Murayama Statement in 1995) for both the war and the recruitment of comfort women for Japanese soldiers.

When Prime Minister Abe travelled to the United States in April, it seemed that he hoped to discuss a forward-thinking discussion of U.S.-Japan relations.

His visit was instead dogged by comments that he affirms previous apologies right after elements of his cabinet appeared to indicate a push in favor of a more revisionist perspective of the period and Prime Minister Abe delivered a gift to a controversial war shrine.

Anything less than a full apology could lead to frostier relations between China and Japan and South Korea and Japan. Any perceived backsliding could undo the painfully slow relaxing of tensions between East Asia’s two largest economies. All three (Japan, South Korea, and China) can ill afford to risk reductions in trade or investment from an unnecessary diplomatic spat.

 

The GRI Weekly Risk Outlook (WRO) provides analytical foresight on the economic consequences of upcoming political developments. Covering a number of future occurrences across the globe, the WRO presents a series of potential upside/downside risks, shedding light on how political decisions affect economic outcomes.

The Weekly Risk Outlook is written by GRI analyst Brian Daigle.

About Author