Weekly Risk Outlook

Weekly Risk Outlook
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Canada votes in tight election. President Xi visits the UK. Housing data adds to Fed rate decision. Brazil Central Bank issues rate decision. Clinton appears before panel. All in the Weekly Risk Outlook.

 

Canada Votes on a Potential Fourth Term for PM Harper

On Monday, Canada will head to the polls to decide whether to maintain Conservative Stephen Harper as Prime Minister or throw support to either the Liberal party’s Justin Trudeau or the National Democratic Party’s Tom Mulcair in their House of Commons votes.

The National Democratic Party has steadily gained influence as the leftist alternative in Canada, and won the second-most seats in the House of Commons for the first time back in 2011.

The NDP also gained significant ground in traditionally conservative Alberta in provincial elections in May, defeating the Progressive Conservatives after 44 years of power.

Whether the NDP can continue its success is a major question. The Liberals, Conservatives and NDP poll at around 30% each, making it difficult to provide a firm projection of results in British Columbia, where as many as 2/3 of their 42 seats are up-for-grabs.

Regardless of which party emerges victorious, the new Canadian government will have a full slate of domestic and international issues to address. As one of the 12 TPP member states, the Canadian House of Commons will have to approve the Trans-Pacific Partnership text upon its release, which NDP leader Mulcair has vowed to scrap, leading to significant controversy.

In addition, Canada recently entered recession, one of the few OECD member states to currently be in such a state.

Canada’s shale oil boom, which had previously provided significant job and economic opportunities across the provinces (though mostly Alberta) increasingly looks like a bust as oil prices remain too low for most fields to remain self-sustaining.

This has already upended Alberta politics, and the national approaches of Trudeau and Mulcair to Canada’s recession may differ significantly from Prime Minister Harper’s economic approach.

 

President Xi Visits the United Kingdom

On Monday, Chinese President Xi Jinping will begin a five-day visit to the United Kingdom, a political foray which will include an audience with Queen Elizabeth II and a discussion with Prime Minister David Cameron and Chancellor of the Exchequer George Osborne.

He will also include in his visit an address to the House of Commons. The Chinese press will likely follow the event closely, and is already devoting attention to the subject.

The Chinese Ministry of Commerce has indicated its expectation that deals in high-speed rail, telecom, and nuclear energy could be in the offing, though the meeting may be complicated by the introduction of human rights discussions as the UK attempts to establish itself as a reliable partner with China.

Labour leader Jeremy Corbyn has already indicated that he will raise human rights issues during President Xi’s visit, though Chinese ambassador to the UK Liu Xiaoming has indicated that President Xi might be offended if the issue were raised.

The last time a Chinese premier visited the UK was ten years ago, making the event a prime opportunity for Prime Minister Cameron to solidify relations and establish London as the center for Chinese investment.

Also on Monday, in the midst of the festivities, the Chinese government will release its third quarter GDP figures, likely to show a continuing slowing trend in growth and retail sales and a miss for its 7% growth target for 2015. Unfortunately, Xi’s visit is unlikely to draw attention away from China’s under-performance.

 

US Housing Data Adds Another Point to the Fed’s Decision

On Tuesday, the US Department of Commerce will release data on housing starts for the month of September.

Current projections suggest that September could be the first month over the past three in which a rise in new housing starts occurred (though this increase may be transitory).

The housing and construction sectors were hit badly by the recession, which had been predicated in part by the collapse of the US house pricing bubble. Housing starts rose steadily for 18 years to a peak of over 2 million starts per month in 2007.

Current numbers are now roughly in line with production in 1991.

Only in May did the construction industry arguably return to levels seen before the recession, unlike the stock market (which hits its 2008 peak in June 2014), consumer spending (December 2012), shipments (July 2014), and the overall economy (October 2011).

A particularly strong showing in the housing sector, with the employment and spending figures such a development would portend, could (with September’s numbers) encourage the Federal Reserve to consider raising interest rates in December 2015.

Although for a long period markets had assumed a Fed rate hike in 2015 as a matter of course, doubts are beginning to resurface that the Fed will delay a hike to 2016. Every data point counts.

 

Brazilian Central Bank Issues Rate Decision

On Wednesday, the Brazilian Central Bank will issue its interest rate decision amid political turmoil.

Most policymakers have indicated their belief that the Bank will keep rates at 14.25%, though the bank’s president Alexandre Tombini pledged to lower the country’s inflation rate to 4.5%, and would likely need to raise rates in order to do so.

This will be a difficult task, with inflation in South America’s largest economy currently hovering around 9.5%, from 7.1% in January, a feat not achieved since 2003.

Brazil’s economic indicators are not helped by the political turmoil in Brasilia (its crisis with water and knock-on effect to electricity are also major problems). President Dilma Rousseff’s received a nasty surprise when the Supreme Court said she acted improperly in her accounting practices in 2014 by taking unauthorized loans from state-owned banks to make up budget shortfalls.

This in turn was used as a pretext by House Speaker Eduardo Cunha to initiate impeachment proceedings against the president, which were halted by the Supreme Court on procedural grounds.

Speaker Cunha’s own legal complications (he is accused of taking millions in bribes connected with the Petrobras scandal) has created an effective standoff between the President and Speaker.

A quid-pro-quo may be in the offing: The speaker could withdraw his impeachment against the President against the President providing the necessary votes in the Workers’ Party to ensure the speaker is not expelled from Congress.

Although these allegations have not been confirmed, even the idea of such a development is not likely to encourage investment in an economy that looks increasingly on the brink of a severe downturn.

 

US Presidential Candidate Clinton Appears Before Benghazi Panel

On Thursday, former Secretary of State Hilary Clinton will appear before the House Select Committee on Benghazi to discuss the role the Department of State (and she as Secretary) took in the September 11, 2012 attacks that killed U.S. Ambassador Chris Stephens.

The select committee, which has existed for a longer period than the Senate Watergate Committee (or any other select committee in either house of Congress) has come under extraordinary scrutiny following House Republican Majority Leader Kevin McCarthy’s comments that tied the Select Committee to Hilary Clinton’s polling numbers, implying the committee is political in nature.

House Republicans, in particular Committee Chair Trey Gowdy, have long argued that the committee is apolitical.

Following Leader McCarthy’s comments, Democrats have argued that the committee should be disbanded, and House Minority Leader Pelosi has threatened to withdraw the Democratic committee members.

The comments from Leader McCarthy have decisively shifted the direction of the Benghazi discussion in American politics. The committee, which uncovered the fact that Clinton had used a private server during her tenure at the Department, has now found itself on the defensive.

This pressure has increased as Clinton suggested the committee is political and presidential hopeful Bernie Sanders argued that discussion of the Clinton emails should stop.

The hearing will provide both an opportunity for Clinton to address the Benghazi attack to the American people (again) and Committee Chair Gowdy to justify the committee’s existence.

 

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 was produced by GRI analyst Brian Daigle.

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