GRI’s Weekly Risk Outlook

GRI’s Weekly Risk Outlook

Americas countries meet in Panama City for OAS summit. Alcoa reports aluminum figures in weak metals market. African currencies prepare themselves for bumpy week. US presidential candidates hint at intentions. Central banks of Australia, Japan, and UK issue statements. All this in GRI’s Weekly Risk Outlook.

Summit of the Americas brings together leaders from Ottawa to Montevideo

On Friday and Saturday, the leaders of all 35 states represented at the Organization of American States (OAS) will gather at Panama City for the 7th Summit of the Americas, under the banner theme “Prosperity with Equity: The Challenge of Cooperation in the Americas.”

Although much of the discussions will likely be for show, two important potential meetings are noteworthy.

First, the heads of state of Cuba and the United States will meet in a formal setting for the first time since the Kennedy administration. Posturing aside, the meeting between Presidents Obama and Raul Castro could significantly accelerate or drag down recent efforts to liberalize relations between the two countries.

The second set of important meetings will be between the Brazilian and U.S. delegations, particularly regarding the subject of closer economic relations. Brazilian Finance Minister Joaquim Levy has signaled a greater desire for closer ties with the U.S., and President Rousseff’ behavior  could signal a more forceful desire for improved ties.

The most important events will probably occur behind closed doors and in narrow hallways outside scheduled fora. Several regional tensions in the Americas will receive fresh coverage as heads of state relish one of the few opportunities to directly confront one another.

Chile and Peru are in another major dispute regarding naval espionage, President Maduro of Venezuela plans to present a petition of at least 5 million signatures requesting President Obama declassify Venezuela as a national security threat, and President Kirchner of Argentina will likely have tough words for President Obama regarding the longstanding holdout creditor dispute between U.S. bondholders and Argentine debtors (which will likely only be resolved following October’s Argentine presidential elections).

Alcoa reports on aluminum as global metals markets slip

Alcoa, one of the world’s largest aluminum producers, is slated to report profit earnings on Wednesday after markets close. Watch Alcoa’s report as a potential bellweather indication not only of the aluminum market, but also other major metals markets as companies try to adjust to a slowing China.

The aluminum market, like many other commodities, has been negatively affected by falling growth rates from China, and growth figures in the OECD suggest that the developed world will not be able to make up for the gap.

Aluminum prices have fallen since the beginning of the oil price collapse in November, and may be hitting a new normal at the ~$.80/lb range.

Although many producers have been affected by the slump – including a fall in interest with West African metals potential – none have been hit as hard as Brazil (Brazil is the world’s 8th largest aluminum producer).

Last week, Alcoa and BHP Billiton announced they would be closing a major Brazilian smelting plant in the northern Brazilian state of Para, reflecting higher costs and  significant questions regarding the possibilities of water and energy rationing in Brazil.

The collapse of the commodities market has hit Latin American mining producers (like Chile) and agriculture producers (like Argentina) particularly hard, and the reduction of major aluminum plants in Brazil from 6 in 2008 to only 2 today is illustrative of that trend.

African currencies are in for a bumpy ride

Last week, Nigeria held very closely contested presidential and parliamentary elections which, for the first time since Nigeria’s return to democracy, saw an incumbent President Goodluck Jonathan ousted by All Progressives Congress leader Muhammadu Buhari, followed by a peaceful turnover of power.

The peaceful turnover, as well as hopes that Buhari will prove to be a more capable counter to the rise of Boko Haram in Nigeria’s Muslim north, will likely boost Nigeria’s currency, the naira.

The naira hit a nosedive as tensions with Boko Haram increased, going in the course of two weeks from ₦189/$1 to ₦204.3/$1 in February, 2015.

In Kenya, the pressure on both the Kenyan shilling and bond yields will likely rise significantly in the coming week. Today represents the first full day of trading since the deadly attack Thursday of Islamic militants at Garissa University College, the deadliest terrorist attack in Kenya since the 1998 U.S. embassy bombings.

The Kenyan shilling, which luckily does not face the same degree of oil-based pressure that Nigeria’s oil-dependent naira does, has still depreciated steadily since November, falling from KSh88/$1 to KSh93.5/$1.

Kenyan government bond yields have also risen, from 11.5% in November to nearly 12.8% right before the attacks.

U.S. Presidential candidates will likely hint at intentions this week or the next

Although one may not realize it from media reports, at this point only one American has officially declared his intention to run for the 2016 presidential election: Senator Ted Cruz.

Given the lack of direct announcements from potential candidates, reporters and political watchers have had to read the tea leaves.

The organization designed as a precursor to a Hillary Clinton candidacy “Ready for Hillary” is reportedly winding down its operations as the Clinton camp possibly purchased campaign office space in New York. Republican Senator Marco Rubio’s staff has indicated it plans to rent out a section of Miami’s Liberty Tower for a special announcement on Saturday.

The most difficult candidate to read is former Republican Governor Jeb Bush, who, despite significant fundraising prowess, will likely struggle to gain the support of Republican primary voters in ways Mitt Romney struggled in 2012.

Other complications in the Republican Party’s primary are leading to a host of internecine struggles: defense hawk Lindsey Graham’s possible candidacy would hurt any other candidate’s chances in South Carolina, the first southern primary state; Indiana governor Mike Pence’s possible longshot candidacy may have been irreparably damaged by the RFRA debacle.

Most importantly, though, Marco Rubio and Jeb Bush both running for the presidency will present significant hurtles in Florida as each uses the same state for operations and likely the major springboard for a successful nomination.

The possibility of a nasty Democratic primary fight between California Attorney General Kamala Harris and Congresswoman Loretta Sanchez to replace retiring Senator Barbara Boxer could also spell trouble as Democrats attempt to forge a united front going into 2016 Presidential and Congressional elections.

Central Bank announcements in the UK, Australia, and Japan

On Tuesday, the Reserve Bank of Australia will release its monthly interest rate announcement.

Last month, the Bank surprised some by maintaining the rate at 2.25% as the economy continues to be pummeled by falling commodity prices particularly in the mining industry. The Australian dollar recently hit a new low against the New Zealand dollar and may reach parity with a new rate cut.

Japan’s Wednesday announcement will follow criticism that the Central Bank’s quasi-quantitative easing measures are falling short of expectations.

In the UK, Thursdays Bank of England rate decision will be the second to last before UK parliamentary elections on May 7. The Bank will also conduct stress tests against the “resilience of the UK banking system against a major external shock.”

All of these announcements will fall on the backdrop of discussions regarding when the U.S. Federal Reserve will raise its own interest rates, which are close to zero now.

Although there had been significant discussion that Janet Yellen would raise rates in June, weak jobs numbers on last Friday suggest that an interest rate hike would be (at the earliest) in September, and market observers increasingly believe November.

Although Australia may lower interest rates in response to weak commodity and housing numbers, Japan and the UK will likely maintain policy – in the former to preserve the legitimacy of the Bank’s QE policies, in the latter to avoid major shifts prior to a highly contested parliamentary election.

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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