Weekly Research Briefing: Risk in Traveling
June 11, 2018
The international financial markets remain full of fear and doubt causing those who look abroad to remain cautious. This hesitancy to commit new monies overseas continues to benefit U.S. risk assets. While most global risk assets pulled back from the edge last week, it was U.S. equities and credit which outperformed. Until emerging market currencies find a floor value and European economic data begins to stabilize, it will take much work to get investors to send their capital abroad.
There is good news for investors with the U.S. economic datapoints showing further strength. And over the weekend, Italy’s new finance minister has also decided to remain in the Euro, which gives Germany and France time to find a creative solution for the Boot. This week will be a big one with central bank decisions from the FOMC, ECB and BoJ. Expect the strong U.S. dollar and trade war uncertainty to appear in the decisions and surrounding conversations. And then on Thursday, the biggest sporting event in the world begins for the next four weeks. Expect trading volumes and financial decision making to be impacted. Good luck with your portfolio and your teams.
Great news out of Milan this weekend…
The newly formed government has decided to remain in the Euro. This was a major source of concern a week ago. We have no idea how long the decision will last but it is a start and will help Italy negotiate with the EU.
Italy’s government has no intention of leaving the euro and plans to focus on cutting debt levels, looking to boost growth through investment and structural reforms rather than deficit spending, the new economy minister said.
In his first interview since taking office a week ago, Giovanni Tria told Corriere della Sera newspaper that he aimed to meet existing debt targets for 2018 and 2019, adding that Italy’s debt commitments were fully sustainable.
“Our goal is (to lift) growth and employment. But we do not plan on reviving growth through deficit spending,” Tria said, adding that he would present new economic forecasts and government goals in September.
“These will be fully coherent with the objective of continuing on the path of lowering the debt/GDP ratio,” he said.
But while Italy looks better, the Emerging Markets look worse even with all the IMF and Central Bank assistance…
So far, few believe the weakness in riskier markets threatens the nine-year-long U.S. stock advance, but the recent market moves have bolstered the case for caution. More turbulence could be in store next week, when the European Central Bank and the Federal Reserve hold their monetary policy meetings. Many expect the Fed to raise interest rates, which would increase pressure on emerging markets and test the ability of some countries to repay dollar-denominated debt.
“Rising global real interest rates are the number one predictor of financial problems in vulnerable economies,” said Kenneth Rogoff, a professor at Harvard University and the former chief economist of the International Monetary Fund. “The risks are greater than people realize.”
Dollar strength is a danger for some countries because it weakens their currencies and makes it more difficult to pay back dollar-denominated debt. Higher U.S. rates dim the allure of foreign assets, especially in emerging markets, where investors often take on greater risk in exchange for higher yields and returns.
At the same time, Europe economic data continues to slow…
German factory orders just turned negative YoY.
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Originally Published at: Weekly Research Briefing: Risk in Traveling