Weekly Risk Outlook

Weekly Risk Outlook
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Investors meet to discuss Brazil woes. Chancellor builds case for UK “In” campaign. Primaries in New York remain decisive. Obama meets with GCC nations. ECB announces rates. All in the Weekly Risk Outlook.

Latin Finance Investors Meet to Discuss Brazil’s Road Ahead

On Tuesday, LatinFinance’s Brazil Issuers & Investors Forum will convene in Sao Paolo to discuss Brazil’s political and macroeconomic environment. They will have a great deal to discuss. The likelihood of impeachment for President Rousseff has risen significantly in recent weeks, and the lower house voted yesterday to move forward with impeachment proceedings to the Senate.

Former President Lula, currently under indictment for not declaring a family property, is under a further legal cloud regarding his position with the Rousseff administration, which may be annulled by higher courts to allow further investigations.

Additionally, Vice President Temer (also under investigation) leaked a recording of a speech he gave preparing to accept the presidency following the removal of President Rousseff from office, which led to President Rousseff’s argument that such an action would be treasonous.

The political environment has become so unstable and counter-productive to growth that developments leading to impeachment also produce jitters in Brazilian stock markets.

Economically, Brazil’s growth outlook was lowered recently to a 3.8% contraction for 2016, dragging down the growth rate for all Latin American economies from 0.5% to 0.3%.

 

UK Chancellor Will Build the Case for In Campaign

On Tuesday, U.K. Chancellor of the Exchequer George Osborne will speak before the Treasury Committee of the House of Commons to discuss the benefits and risks of the UK remaining in the EU.

The committee includes Conservative’s Steve Baker, MP, one of the leaders of the Out campaign’s Conservatives for Britain. Mark Garnier (In), Stephen Hammond (In), Chris Philp (In), Jacob Rees-Mogg (Out), and Andrew Tyrie (Unknown, Chair of Committee) also sit on the select committee.

Chancellor Osborne will be paying strong attention to Chairman Tyrie. One of the remaining undecided/unstated Conservative MPs, and one of the most powerful, Chairman Tyrie has called for further information before making his decision.

He did, however, harshly criticize London mayor and Brexit campaigner Boris Johnson in his appearance when he provided non-committal responses before questions to the committee.

These comments will also be the first by the Government following Labour leader Jeremy Corbyn’s more forceful entry into the Brexit debate. Despite earlier misgivings over the EU, the leader of the Labour Party is moving to represent the view of most Labour Party members and MPs, particularly given the significant divisions within the Conservative movement.

Both the Chancellor and Mr. Corbyn will need to shift the narrative of Brexit inadvertently becoming a referendum on the Conservative government, which the government could fail, given rising criticism over the Prime Minister’s treatment of the Panama Papers scandal, in favor of becoming its own policy discussion.

 

Primaries in New York are Decisive For Both Frontrunners

On Tuesday, the Democratic and Republican parties will hold their primaries for the state of New York. For Democratic contenders Hillary Clinton and Bernie Sanders, there will be 247 pledged delegates up for grabs – the second highest delegate haul remaining, after California.

On the Republican side, Donald Trump, John Kasich, and Ted Cruz will be competing for 95 bound delegates to contend with. Overall, the New York primary will likely help bolster Trump’s fledgling frontrunner status, while more firmly securing Clinton’s lead.

A victory by either Clinton or Sanders in the state will likely not be particularly significant, unless the margin is large. The state, like all states in the Democratic primary/caucus contest for 2016, allocates its delegates proportionately based on vote tally.

That being said, there is much more pressure on the Sanders campaign to perform well in the state, given the campaign’s 200+ pledged delegate deficit with the Clinton campaign and the dwindling states remaining to make up the difference. Current polls suggest Clinton will win, and likely by at least 10 points.

On the Republican state, the allocation of delegates is very different, and could provide a significant boost for Donald Trump’s campaign. A little over a dozen delegates are allocated on a state-wide basis, with the remaining delegates split by Congressional district (3 per district, regardless of the number of Republicans in the district).

Trump is likely to perform well in New York: aside from his home-state advantage, Ted Cruz has done very poorly in trying to appeal to New Yorkers, meaning the remainder of votes will likely split between Cruz and Kasich (and possibly shut them out of the nearly 100-delegate state).

 

President Obama Meets with GCC Nations to Quell Allies’ Concerns

On Wednesday, President Obama will meet with the heads of state of the Gulf Cooperation Council countries-Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE.

His meeting with these leaders is likely to try to diminish some of the concerns that have bubbled up since implementation of the Iran nuclear deal.

Additionally, a recent interview between Jeffrey Goldberg and President Obama, in which the latter referred to the issue of “free riders” among America’s Middle East allies, likely raised eyebrows across the GCC.

It is uncertain, however, whether this meeting will help to mend fences in any demonstrably important way, particularly considering that President Obama only has 9 months remaining in his presidency.

However, any move to further strengthen ties could benefit the next administration by making the transition easier, particularly when dealing with shared conflicts like the efforts to eliminate ISIS and stabilize key conflict areas like Yemen and Syria.

 

European Central Bank Announces Interest Rate Decision

On Thursday, ECB President Mario Draghi will announce the European Central Bank’s interest rate decision for the month of April.

This will represent the first interest rate decision since the ECB cut interest rates to zero last month.

Last month also saw the announcement of an expansion in the ECB’s quantitative easing program, larger than most analysts had forecast, with a prediction from President Draghi that inflation for the euro was likely to be negative for several months as well as interest rates: “Rates will stay low, very low, for a long period of time and well past the horizon of or purchases.”

Although he predicted in the same press conference that interest rates would not likely fall below zero, he also noted that new economic information could change that outlook.

Even if the ECB opts not to lower rates this week, it appears likely that ECB rates will hover around zero for at least the next quarter.

 

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.

This Weekly Risk Outlook was written by GRI analyst Brian Daigle.

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