Weekly Risk Outlook

Weekly Risk Outlook
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U.S. primaries could make some unbeatable. Spanish leader seeks to form government. Brazil reports GDP. China makes 5-year goals. Brexit debate begins. All in the Weekly Risk Outlook.

Super Tuesday primaries could make Hillary Clinton and Donald Trump nearly unbeatable

On Tuesday, primaries and caucuses for the Democratic and Republican parties will be held in a dozen states (and one territory) representing every region in the country (Alaska, Alabama, Arkansas, Colorado, Georgia, Massachusetts, Minnesota, Oklahoma, Tennessee, Texas, Vermont and Virginia, as well as American Samoa).

Six of those states represent Republican powerhouses (particularly Texas), which helps to explain why nearly ¼ of all delegates to the Republican national convention (and approximately half of those needed to secure a majority) will be selected on that date.

For the Democrats, most of these states are less significant for their general election strategy so they represent fewer delegates to be gained.

That being said, a strong showing by former Secretary of State Hillary Clinton across the board (with the exception of Vermont, were home state Senator Bernie Sanders is expected to win handily) would narrow Senator Sanders’ path to the nomination considerably.

Secretary Clinton has maintained strong leads ahead of Senator Sanders among the African American community, which is likely to propel her to victories across much of the South.

Senator Sanders’ strategy has largely focused for Super Tuesday on caucus states in other regions, notably in Colorado and Minnesota. A loss in either of those states is likely to increase perceptions that the Democratic nomination is Secretary Clinton’s.

On the Republican side, both Senators Ted Cruz and Marco Rubio face enormous tests against Donald Trump.

If Mr. Trump performs reasonably well in these states (as many polls have forecast), it would be nearly impossible for any other candidate to secure a majority of the delegates, and may be impossible to deny Mr. Trump a majority (as opposed to a plurality of delegates, with the remaining majority split amongst various candidates that could consolidate forces around an anti-Trump candidate).

Both Senators need to perform well, but Senator Cruz has a particularly large challenge in not only keeping his native state Texas in his column, but rack up a strong enough showing to deny both Senator Rubio and Mr. Trump significant delegate numbers across the South.

It would not be surprising if at least one candidate were to drop out if it became clear that a viable path to the nomination was no longer a possibility, though that would likely only occur in the event of a Trump blowout.

 

Spanish Socialist leader seeks to lead Spanish government as coalition talks continue for 11th week

On Tuesday, Spanish Socialist Party leader Pedro Sanchez will address the Spanish Parliament in an attempt to secure majority support to take the position of Prime Minister from incumbent PP Party leader Mariano Rajoy, followed by a scheduled Wednesday vote of confidence in the Chamber.

On its face, this appears to be mathematically impossible; in the 350-seat Congress of Deputies, Sanchez’s Socialists were only able to secure 90 votes in the December 20 election, and the Socialists’ likely coalition partner in such a scenario, the anti-corruption centrist Ciudadanos Party only has 40 seats, leaving this coalition well short of a 176-seat majority.

Should the 123-seat PP abstain from voting, however, the coalition would secure a majority. Despite the possibility of forming a relatively stable minority coalition without the need to secure support for the anti-austerity Podemos Party (with 69 seats) should such a strategy be pursued, Prime Minister Rajoy has indicated this is unlikely to occur even though his own party was also unable to secure its own majority to rule the Spanish government.

Both PM Rajoy and Deputy PM Soraya Saenz de Santamaria have both signaled that they believe the Socialist-Ciudadanos coalition is doomed to fail and that future elections appear likely.

Ruling out a broad coalition between the two major parties (as the Socialists did) or acquiescing to a relatively weak minority coalition government is a major political risk for PM Rajoy. On the one hand, if the PP is able to secure greater support in a re-do election, it might be able to secure sufficient support to maintain its leadership position.

However, the fact that it was unable to secure the support of even the centrist Ciudadanos (to say nothing of the center-left Socialists or the much further left Podemos) highlights the likelihood that it may have to go it alone, meaning if it doesn’t secure an absolute majority it could fail.

Should this occur, and depending on whether the Socialists gain a stronger foothold among the electorate, a new center-left majority may emerge in Spain.

Either way, if this week’s vote of confidence fails for Sanchez, this will likely spell further weeks, if not months, of political uncertainty as Spain makes its painful transition from an effectively two-party system to a multi-party polity.

 

Brazil reports GDP data as Central Bank is expected to maintain high interest rates

On Wednesday, the Brazilian Central Bank is expected to maintain interest rates at 14.25%. The Central Bank has held rates at that high level since last August, following at least six increases in the eight months preceding.

This decision will be followed on Thursday with Brazil’s report of 2015 GDP growth rate for the country, with analysts currently predicting the largest contraction in South America’s largest economy in nearly 30 years.

This sharp reduction is likely due to a number of factors coming to a head at the same time: the collapse in oil prices has left Brazil’s oil production spiraling, the Petrobras scandal has significantly damaged Brazil’s business environment, austerity measures initiated by the Rousseff administration have reduced domestic spending, the fall in prices for major commodities has squeezed the profitability of Brazil’s export markets, and domestic demand has fallen significantly.

Possibly just as importantly, Brazil’s political environment has continued to see upheaval that has made it difficult for investors to determine government spending priorities and whether a sufficiently large majority exists in the Congress to head off a political earthquake (like the impeachment of President Rousseff).

The recent arrest of President Rousseff’s campaign manager Joao Santana in connection with the Petrobras scandal has drawn the investigation closer to the President herself, as well as former President Lula da Silva.

In addition to complicating the long term goal of remaining in office, the continuing chatter around impeachment of the President is making it difficult to advance short-term goals as a scattered political landscape makes it increasingly tough to forge a working majority around policy.

 

China’s Consultative Conference and National People’s Congress will spell out China’s 5 year goals

On Thursday, China’s People’s Consultative Conference, which serves as a gathering point for China’s elite to forge a comprehensive strategy ahead of the National People’s Congress, will convene for two days.

Following the meeting of Chinese politicians, business leaders and academics, the12th National People’s Congress, led by Premier Li Keqiang, will lay out GDP growth targets and the national budget beginning Saturday.

Vice Minister of Foreign Affairs Fu Ying is also slated to speak.

It is difficult at this point to determine what impact these events will have outside China.

Foreign markets and investors have grown increasingly skeptical regarding China’s official growth projections and statistics, so any firm targets for growth rates may be taken with a grain of salt.

However, a major shift in tone or government priority in either a foreign policy realm or in domestic economic policies could gain attention from the international community.

A reduction in growth targets is likely to signal the Chinese government expects growth to continue to slow, and discussion of a shift away from production in favor of consumption could shift stocks in everything from consumer electronics to copper.

Other topics of discussion this year include the Internet Plus plan, an initiative by the Chinese government to connect smaller businesses to the internet, and a “Made in China” initiative that may hew to Prime Minister Modi’s “Made in India” government initiative to spur domestic production by reducing regulatory barriers for international investment.

Finally, the distribution of funds in the government’s budget could signal future or shifting priorities (increasing or decreasing infrastructure spending, for example).

 

Brexit debate begins in earnest as both sides angle for advantage and international actors weigh in

Following last week’s announcement by the Cameron government that a deal had been reached with EU leadership to renegotiate Britain’s relationship with the European Union, both the In and Out campaigns began actively courting voters and politicians ahead of the June 23 referendum date.

Although that date is over 100 days away, this has not stopped major party leaders in the UK and across Europe from speaking out.

On Thursday, UK Business Secretary Sajid Javid and Labour Party leader Jeremy Corbyn will address the British Chamber of Commerce conference regarding the Brexit campaign (the business community could emerge as a key factor in mobilizing resources and voters ahead of the referendum).

Also on Thursday, German Finance Minister Wolfgang Schaeuble will visit London to deliver three speeches focused on keeping the UK in the EU, first by speaking to the Chambers of commerce, followed by remarks at the Financial Institutions Forum and concluding at the London School of Economics.

The mobilization of forces both in favor of and against the election will likely look similar to the Scottish independence referendum in September 2014, particularly if, as was the case in Scotland, polls show a tightening in support in favor and against.

During much of the Scottish independence referendum, fairly scant attention was paid by most elites outside Scotland until a YouGov poll showed the Yes campaign with a higher level of support than the No campaign after months and months of being way behind.

Given how close the independence referendum ended up being (55%-45%), it is unlikely that Prime Minister Cameron will make the same mistake by waiting until his side is behind before mobilizing.

Markets have already begun to pay attention, with the pound falling to a 7-year low against the dollar following London mayor Boris Johnson’s announcement last week that he would support the Out campaign.

Any major developments on either the In or Out side in the next few months are likely to roil markets (particularly currency markets), just as was the case during the months leading up to the Scottish independence referendum.

 

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.

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