News & Analysis

Week Ahead – Geopolitics Risks and Global Growth Concerns

October 21, 2019

By Deepta Bolaky
 @DeeptaGOMarkets

Week Ahead

 Geopolitics Risks and Global Growth Concerns 

Geopolitics remain at the forefront with Brexit, US-China trade updates, Canadian elections, EU tariffs, protests in Hong-Kong and Catalonia and tensions in the Middle East. Risk appetite will remain fragile as growth concerns were revived following China’s GDP figures on Friday.

Brexit – The Unsigned Letter 

The Super Saturday saw the UK Parliament rejecting the withdrawal deal and forcing Prime Minister, Boris Johnson to seek a delay to Brexit to comply with the Benn Act. A defiant British government sent three letters to the EU, one of which was unsigned by the Prime Minister who insists that the UK would leave the European Union on October 31.

Market participants will mull the response from the EU. This week will be another week dominated by Brexit-related headlines as investors wait for the EU’s agreement to postpone Brexit. 

What’s Next for Brexit?

Monday will see a meaningful vote in the Commons which gives room to the following scenarios:

  • Leave with Deal
  • Leave with No-Deal
  • General Election or Second Referendum

As of writing, news that the Labour Party would seek the backing of rebel Tories and the DUP to force the Prime Minister who has a minority government to make amendments that could result into a softer Brexit or dropping the deal are overshadowing the hopes of the new Brexit plan winning a clear majority.

Market participants will have no other choices than to wait for further developments and see if there is enough support for a customs union amendment and a second referendum to gauge the path for Brexit ahead of the deadline.

Last week’s impressive rally in the British Pound eased due to the uncertainties, but the local currency is still buying at around 1.2895 US dollar. 

Europe

Europe will in the spotlight for reasons other than Brexit. The European Central Bank will meet on Thursday. President Mario Draghi has doubled down on its negative rate policy in his last meeting and has re-started the controversial quantitative easing of bond-buying.

Quantitative easing and negative rate policy are those unconventional policy measures that are widely being considered again as the global economic outlook has deteriorated and the financial stability environment remains challenging.

Before Christine Lagarde takes over on November 1, we expect his last meeting to defend his recent move. Ahead of the meeting, the preliminary figures on the activity on factories and services providers will be released which will help traders to assess the signs of a further slowdown.

Also, tariffs would also gather some attention. The round of tariffs on $7.5billion in European goods took effect on Friday after the WTO ruled against the European Union. The EU pledged to retaliate in a tit-for-tat tariff which will probably be applied after the WTO fixes the damage sum next year. However, investors will likely monitor if there are attempts of negotiations to address the issue on both sides or signs that involved parties is willing to negotiate to avoid causing economic harm.

Canada Elections

While many are focused on Brexit, traders will also keep an eye on the election in Canada as it will be challenging for either one of the major parties to win a full majority. There are high chances that the Liberal Party and the Conservative will have to rely on small parties.


Published on: Bloomberg

As both the Liberal Party and the Conservative are in a tight race, the New Democratic Party are on the rise in a late surge in popularity. The scandal that played against Prime Minister Justin Trudeau has seen him losing voters to Jagmeet Singh.

A clear win for the current Prime Minister may come if voters are able to overcome the recent scandals as past missteps where he was younger. The recent support from Barack Obama may help the Canadian leader to win back some voters.

As far as the Canadian dollar is concerned, we expect the election to bring some short-term volatility. The economy is faring well and recent economic data has been positive enough to reduce the likelihood that the Bank of Canada will cut interest rates. The Canadian dollar has rallied recently back by its economic performance. The USDCAD is currently stable in a tight range at 1.31 and we expect political risks and a probable fragmented government to bring some volatility. 

If Justin Trudeau wins, the local currency could bolster higher. 

Tuesday, 22 October 2019
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