A journalist once asked Harold Macmillan what is most likely to blow governments off course, to which he replied, “Events, dear boy, events”. This encounter may be apocryphal but financial markets certainly face a flood of “events” before the year end. Here are six to consider.
3rd November – Bank of England Inflation Report. After yesterday’s GDP release, next week’s MPC decision has lost much of its potency. In September the Bank said it would ease policy if the economy evolved as expected. However, the Bank expected third quarter growth of 0.1% qoq and the outturn was 0.5%. It is safe to say the revised forecast unveiled next week will show no need for an immediate rate cut.
8th November – US Presidential Election. With Hillary Clinton seen as the continuity candidate and an establishment member, the risk to markets is a Trump win. At the time of writing, Real Clear Politics has Clinton leading Trump in the polls by 48.5 to 42.8, which translates into a convincing 333-205 win at the electoral college.
23rd November – UK Autumn Statement. Strong third quarter growth figures also reduce the need for a “fiscal reset” and improve the underlying numbers. The OBR will surely forecast somewhat slower growth in 2017 which will push up budget deficit projections compared with previously but there may still be room for a modest infrastructure spending boost.
4th December – Italian Constitutional Referendum. This may be the most under-appreciated risk. The proposed reforms are designed to make Italy more governable but there are plenty of reasons for a protest No vote – high youth unemployment, weak economic growth, anti-EU feeling and a severe migrant crisis. If the outcome is No, then PM Matteo Renzi is set to resign, which will lead to a technocratic government at best or a populist Eurosceptic one at worst until elections due in 2018.
However, with a little imagination, Italy could descend into an economic and political crisis; extreme, anti-EU candidates could win power in France and Germany next year; and the first cracks in the euro could appear. It is not our central view but who knows? The latest polls show No has a small lead over Yes but with plenty of voters undecided.
8th December – ECB Policy Decision. The key question is what the ECB will do after its current asset purchase scheme expires in March. Mr Draghi has promised a decision at this meeting which will move markets either way. Our best guess is more bond purchases but at a diminishing rate.
14th December – FOMC Policy Decision. The Fed has been keen to raise interest rates (rightly in our opinion) for some while as inflation pressures slowly build. The FOMC will do nothing on 2nd November, six days ahead of the presidential election, but is very likely to raise by 25 bps on 14th December provided the economic data stays firm.
Conclusion. Most of the above events are background worries, which should not disturb portfolios unduly. The one we fear is the Italian referendum where a bad outcome is distinctly possible and the longer term consequences are unknown and potentially serious.
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