Weekly Risk Outlook

Weekly Risk Outlook
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House votes as Ryan takes speakership. Fed Chair speaks to Congress. South Korean meets with Japanese Premier. Asian, European ministers discuss climate. Energy summit in London. All this in the Weekly Risk Outlook.

Paul Ryan’s New Speakership Tested by US High-Way Bill

On Monday, the lower house of the U.S. Congress is expected to take up a 6-year bill to fund the country’s highway network.

The $325 billion bill to fund the Highway Trust Fund is expected to be contentious among House Republicans as the bill contains only three years’ worth of funding for the six year appropriation (similar to the Senate-passed 6-year extension bill).

Aside from the obvious economic impact of more stable funding for infrastructure spending in the world’s largest economy (which has been called for repeatedly by the IMF), a more immediate question arises: how will new speaker Paul Ryan (R-WI) maneuver with the House Freedom Caucus over the large (and in some years unfunded) Congressional mandate?

With Speaker Boehner’s resignation largely viewed as a result of the persistent 40-member Freedom Caucus to prevent the speaker from securing either a majority of the majority (the Hastert Rule) or a majority of the House without Democratic support, it remains questionable that Speaker Ryan will be able to cooperate effectively with the Freedom Caucus.

His attitude towards the House Republicans, and how he works with the Freedom Caucus (currently conciliatory) on the highway bill, represents a first look into the relationship the Speaker will secure with his party.

A confrontational relationship, one that often paralyzed Speaker Boehner’s role, could bring policy developments to a halt.

A more conciliatory approach that does not lead to bills a Democratic president would veto could help release logjam on a number of policy fronts in education, entitlements reform, a broad tax reform bill, and criminal justice reform.

 

Fed Chair Speaks to Congress as Rate Hike Delay Rumors Swirl

On Wednesday, Federal Reserve Chair Janet Yellen will give testimony to the House Financial Services Committee regarding supervision of the Federal Reserve and regulation of the U.S. financial regulatory system.

Two important components of the testimony will be followed by market analysts and financial advisors. One is seen in any calls made by the Financial Services Committee Republicans (and possibly a few Democrats) for greater oversight of the Federal Reserve Bank. The other would be seen in any indications from Yellen on when an interest rate hike may be happen.

Several Republicans on the House Financial Services Committee, including Congressmen McHenryMulvaney, and Huizenga, have called for significantly greater oversight of the Federal Reserve, which the Fed has resisted as infringing on its political independence.

Other Republican Financial Services Committee members have called for the Federal Reserve to raise interest rates sooner rather than later.

The meeting is very likely to include discussions of when the Federal Reserve intends to raise interest rates, and Yellen will need to craft an appropriate response to limit the ire of Committee members.

Many Democrats on the panel, including Ranking Member Maxine Waters, have called for the Fed to hold off on raising interest rates to protect the recent economic recovery.

 

South Korean President Meets with Japanese Premier

On Monday, South Korean President Park Geun-Hye will hold her first summit with Japanese Prime Minister Shinzo Abe following her dropped condition that Prime Minister Abe personally apologize for Japan’s wartime policies towards Korean women (Abe has upheld previous apologies made by the Japanese government, though has not personally made his own).

Some analysts have suggested that President Park has created a “two-track” approach to relations between South Korea and Japan: one track expressing criticism over Japan’s seeming stepping back from, or rewriting, its role in World War II, the other exploring opportunities for economic cooperation and containing the unstable policies of North Korea.

President Park will also meet jointly with high-level Japanese and Chinese officials to discuss greater economic collaboration between the three countries.

Trade relations between the three are already and will continue to be increasingly complex; Japan will be one of the 12 founding members of the Trans-Pacific Partnership, China is leading negotiations on the Regional Comprehensive Economic Partnership (RCEP), and South Korea is exploring further collaboration in both.

 

Asian and European Foreign Ministers Discuss Climate Efforts

On Thursday, the foreign ministers of the EU and the Asia-Pacific will meet in Luxembourg to discuss climate efforts under the theme of “Working together for a sustainable and secure future.”

This meeting will act as a key point for a large swathe of developed and developing countries to discuss (both formally and not) their climate proposals ahead of the December UN Conference on Climate Change (COP 21) in Paris.

Intended National Determined Contributions (INDCs) have been submitted by many of the ASEM countries, though the contributions and designs of the INDCs vary widely across the region. The EU proposal calls for a 40% reduction of emissions from 1990 levels while the proposal from China commits to peak its emissions by 2030.

A recent report by the UN Framework Convention on Climate Change (UNFCCC) unexpectedly noted that the current INDCs will limit temperature rises to 2.7◦ C by 2100, though it also noted that these contributions may ultimately not be enough.

Jockeying among the EU and Asian states over final contributions represents a major economic and geopolitical discussion; the costs of maintaining contributions and arguments over which countries should contribute the most (and timelines for implementation) are all up for discussion and have potentially significant economic impact.

The ASEM meeting in Luxembourg will represent one of the largest and most singularly focused climate discussion in anticipation of the Paris Summit.

The countries of the ASEM (Asia-Europe Meeting) range from Ireland to Australia. Foreign minister meetings occur every two years and switch off with biennial leader summits. The next one will be held in July 2016 in Ulaanbaatar, Mongolia.

 

Energy Summit Brings Business Leaders to London

On Wednesday, the Economist will hold its 2015 Energy Summit to bring senior level officials from major (mostly European) oil companies (such as BP, Statoil, Total) together with government officials, regulators, and academics.

Similar to the ASEU summit in Luxembourg this week, the Energy Summit will mark a key moment for industry and government officials to discuss the implications of the Paris Climate Summit (COP 21) on the energy field.

Given the tilted emphasis on oil producers, the discussion will also likely focus heavily on short and medium-term projections for the future of oil prices.

The fall in oil prices has led to spiraling economic conditions and poor government budget outlooks in a number of key oil-producing countries (notably Russia, Venezuela, and Nigeria).

Major oil companies, including Exxon-Mobil and Chevron, have taken recent hits in profit margins, and certain regions face the possibility of a severe economic slowdown.

It is difficult to forecast the direction of energy markets, particularly as the production of renewable energy is becoming cheaper and global growth rates remain uneven.

Nevertheless, with oil prices hovering at around $50 a barrel having plummeted from more than double that a little over a year ago, the learning curve on adjusting to this reality will likely be a major topic at the Energy Summit.

 

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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