Weekly Risk Outlook

Weekly Risk Outlook

Brazil continues impeachment process. Obama speaks at Hannover Messe. Northeast primaries could end GOP and Democratic races. Fed to maintain rates. Chancellor of Exchequer heads back to treasury. All in the Weekly Risk Outlook.

Brazil’s Senate forms committee to continue impeachment of President

Today, Monday, the Brazilian Senate will form a special impeachment committee to consider the recommendation last week from the Chamber of Deputies to proceed with an investigation and trial for embattled President Rousseff.

Following the loss of the PMDB from the ruling coalition, the likelihood of impeachment for the President (and subsequent removal) rose significantly.

Markets have generally viewed the political environment as destabilizing, which is one of the main reasons why Brazilian stocks have risen with major developments leading to impeachment.

Despite economic and political forces converging in favor of the impeachment and removal of President Rousseff from office, this process is likely to be long and politically fraught.

Following a recommendation by this week’s Senate impeachment committee in favor of impeachment, the wider Senate will need to vote (with a simple majority) on proceeding with an impeachment trial. This process may be hindered if President Rousseff takes the case to the Supreme Federal Tribunal if she believes the proceedings were legally impermissible.

If the Tribunal allows the trial to go forward, the Senate will go on with trying President Rousseff. During the trial, she will be suspended from office, and her vice president Michel Temer (a PMDB member also under investigation for the same corrupt practices dogging President Rousseff), will take office as president.

He will have all the powers to enact policy and appoint government officials. The Senate trial can last no longer than six months (at which point if no decision is made, President Rousseff will be reinstated), and only a 2/3rd vote can remove her.

Given the politically precarious position of all parties involved, it appears likely that the process will be a slow and drawn-out one.

 

Following London trip, President Obama will speak at Hannover Messe fair

Also today, President Obama will travel to Germany to attend the Hannover Messe industry fair, a meeting of R&D, industry automation, IT, industrial supply, and services.

The meeting, which brings together industry professionals and government officials, will mark a unique opportunity for President Obama to meet with both EU government officials as well as the business community.

Following his Monday speech, President Obama will also meet with the leaders of Germany, France, the UK, Italy, and Spain to discuss counter-terrorism efforts and the ongoing refugee situation. There is also some speculation that President Obama will discuss the ongoing TTIP negotiations with Chancellor Angela Merkel.

With negotiations slowly moving along, and it appearing less and less likely that a full and comprehensive deal will be reached during President Obama’s last year in office, some have indicated that the President may be open to a TTIP-“lite” agreement that avoids some of the thornier issues while covering the areas of common agreement.

One of the reasons he may be reaching out to the German government is it is less likely to have much invested in some of the more controversial elements of TTIP, like the labeling of food products based on their place of origin (geographical indicators). This approach, however, could easily lead to push-back from the French and Italian governments that have long called for GI labelling (Parmigiano-Reggiano, champagne, Parma ham, Roquefort cheese, etc.).

 

Primaries in Northeastern states could effectively end the Republican and Democratic races

On Tuesday, the states of Connecticut, Delaware, Maryland, Rhode Island and Pennsylvania will hold their primary elections, where the Republicans have 170 delegates up for grabs, contrasted with New York’s 95 delegates (though 54 of the 71 Pennsylvania delegates are uncommitted).

On the Democratic side, 384 pledged delegates will be contested. Similar to New York, these five states look to be very friendly territory for the front-runners Hillary Clinton and Donald Trump. FiveThirtyEight has forecast Clinton and Trump at the very least winning Maryland, Pennsylvania, and Connecticut (Delaware and Rhode Island have had minimal polling so far).

Additionally, the two other major contenders – Bernie Sanders and Ted Cruz – appear to largely have failed to make significant inroads in the Northeast aside from specific states more naturally disposed to them (Senator Sanders having won his home state of Vermont and neighboring New Hampshire and nearby Maine, Senator Cruz having won the caucus state of Maine).

Many have viewed the New York primary as a relatively healthy proxy of this week’s primary votes, though it is doubtful that the margin of victory for either candidate will be as large in these states (though Secretary Clinton’s margin in Maryland could be an exception).

In the case of Donald Trump, his margin was doubtless boosted in New York by Senator Cruz’s dismissive attitude to what he frequently referred to as “New York values”, while former Secretary of State Hillary Clinton’s representation of New York in the Senate for eight years is unlikely to pay any significant dividends in another state, like Delaware.

If Clinton and Trump do well in these states, this will narrow even further the path for Senators Sanders and Cruz to secure their party’s nominations. Senator Cruz’s poor showing in New York has made it virtually impossible for him to win the Republican nomination outright (he would need over 90% of the remaining delegates), and if he does poorly in states like Pennsylvania and Maryland, Trump’s delegate lead will pull away from Cruz’s to the point that Trump may win on a first ballot.

On the Democratic side, although it is possible for Senator Sanders to win the pledged delegate count, the chances are also fairly remote (at this point he needs to win at least 55% of remaining delegates, and if he performs poorly in these states, that number could rise to 65%).

Overall, these states are likely to both solidify and expand the leads of Secretary Clinton and Trump.

 

Federal Reserve likely to maintain interest rates, though economy continues to improve

On Wednesday, the Federal Open Market Committee is likely to maintain U.S. interest rates at between 0.25 and 0.50. There are likely many factors that will weigh on this decision, including broader global consequences and possibly the political consideration of shifting interest rates close to the presidential election (the Federal Reserve, it should be noted, has gotten more significant attention, particularly on the Republican side, in presidential politics).

Despite that, jobless claims fell last week to the lowest level since 1973, suggesting the labor market is improving. This coincided with a rise of 215,000 jobs in March and more workers entering (and reentering) the labor force.

In addition, the number of people on unemployment rolls in the United States also fell to its lowest level since 2000, all facts indicating that the labor market continues to improve despite geopolitical and economic concerns abroad.

 

Chancellor of the Exchequer heads back to the Treasury Committee

On Thursday UK Chancellor of the Exchequer George Osborne will meet again with the House of Commons Treasury Committee to discuss the short-term economic impact of the UK withdrawing from the EU.

A previous report, exploring the long term economic consequences of Brexit 15 years after exit, has already been presented to the Treasury Committee and projected a loss per household of between £2,600 and £5,200 depending on the trade position adopted by the UK following an exit from the EU (EEA membership, negotiated FTA with the EU, and unilateral global tariff elimination).

The long term estimate also explored overall tax receipt losses of between £20 and £45 billion, raising questions over how the government would make up those tax losses (though the report’s estimates have been criticized for assuming poor trade policies would be pursued by the UK government).

The short term report will likely have more political salience for In MPs trying to convince voters to support remaining in the European Union (or if the impact is minimal, may be used by those supporting Out).

 

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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