The strategic alliance between the two firms will provide clients with unparalleled strategic
corporate services in highly disruptive environments
by Brunello Rosa
19 October 2020
As the second wave of the pandemic is in full swing, its economic impact is becoming increasingly evident. The rapid increase of new daily Covid cases in Europe, which have recently surpassed those of the US, is forcing a number of European countries to implement renewed restrictions, such as partial lockdowns, or tiered systems such as those adopted by the UK. If the experience of the Spanish flu is of any guidance, the world might even experience a third wave in spring 2021, before a combination of incipient herd immunity, better treatment and availability of vaccines finally manage to tame the pandemic in H2 2021.
As a result of a longer than expected pandemic and more restrictive measures, the economic impact of Covid-19 is likely to be larger and longer than initially estimated. According to the latest estimates of the IMF, although global growth should fall less this year than had been expected in June (by 4.4% in 2020, with a 0.8% upward revision) the rebound after that is also expected to be shallower (5.2% in 2021, vs the 5.4% that had been expected in June). So, the IMF too is getting closer to the idea that the recovery will be U-, rather than V-shaped. But we consider even these projections to be too optimistic.
If that is the case, it means that policy support is likely be larger and more prolonged than had been initially envisioned. During the IMF meeting a message emerged clearly: fiscal stimulus needs to be at the forefront of the policy response, with monetary policy either complementing fiscal policy or – bluntly said – simply monetising the ballooning fiscal deficits and debts.
In fact, according to the latest forecasts in the IMF’s fiscal monitor, the US will reach a deficit of 18.7% of GDP, the UK of 16.5%, and the euro area of 10.1% in 2020, with France 10.8% and Italy at 13%.
In terms of gross public debt in percentage of GDP, the IMF estimates the US to reach 131.2% in 2020, the UK 108%, the Euro area 101.1, with France at 118.7% and Italy at 161.8%.
As a result of these ballooning levels of public deficits and debts, rating agencies are starting to re-evaluate the sustainability of public finances, and starting to take action accordingly. During the last week end, Morningstar DBRS downgraded France from AAA to AA, with the outlook moved from negative to stable. Equally, Moody’s has downgraded the UK from Aa2 to Aa3, also changing the outlook from negative to stable. The downgrades of these solid sovereign issuers will have little market impact, especially because the respective interest rate curves in those countries remain historically low. But for other countries, rating actions might have a larger impact.
For example, the Italian rating will be reviewed by S&P Global, DBRS and Moody’s between October 23rd and November 6th. After the recent downgrades of more solid sovereigns such as the UK and France, a downgrade of the Italian rating becomes more likely. However, Italy’s position is more precarious as the country is already at the bottom of the investment grade grid, being Baa3 for Moody’s, BBB for S&P, BBB- for Fitch and BBBh for DBRS. A downgrade by Moody’s and Fitch would make Italy one of the most significant “fallen angels” of this crisis.
In terms of immediate impact, the effects of a potential downgrade have been partially softened by the ECB, which has already said that “fallen angels” will continue to be used as collateral in refinancing operations or in PELTROs. However, asset managers following indices may need to start rebalancing their portfolios as a result of a downgrade. All this is to say that Covid-19 not only can attack the human body in unexpected ways, but may have larger economic repercussions than was initially envisaged.
by Marco Lucchin
15 October 2020
by Alessandro Magnoli Bocchi Fawaz Sulaiman Al Mughrabi
1 October 2020
by Brunello Rosa and Fawaz Al Mughrabi
6 October 2020
By Peter Cecchini
18 September 2020
by Brunello Rosa
23 September 2020
by Brunello Rosa
22 September 2020
Subscribe to receive our free weekly Viewsletter "Making Sense of This World"
by John Hulsman
7 October 2020
Introduction: Three Groups Wake Up To A New Reality
In between the reality television miasma that the US election has descended into, the bleak resurgence of the Covid pandemic, and the looming, global economic crisis, it is easy to miss the faint blossoming of good news, particularly when it emanates from (of all places) the geopolitical sinkhole that is the Middle East. Yet the improbable recent Abraham peace agreement between the UAE, Bahrain, and Israel is the real deal, a sea change in the region that has the potential to fundamentally better it.
The Abraham accord, which marks the first accommodation between Arab countries and their traditional enemy Israel in twenty years, came about because three major players in the region—the US, the Sunni Arab states, and Israel—all changed their minds about the fundamental geostrategic underpinnings in the Middle East.
Wanting something better, and seeing that their long-term foreign policy goals were slipping away, all three creatively inverted their strategic priorities. In doing so, they have freed themselves from the strictures of an unappealing past, checked counter-moves designed to sideline them (such as the new Sino-Iran accord), and overcome political risk hurdles looming just ahead in the future.
The US Begins To De-Emphasize The Middle Eastern Swamp
An unidentified Irishman (and not Churchill as is commonly thought) knew his US cousins well when he sardonically put it, ‘The Americans can be depended on to do the right thing; but only after they have exhausted every other option.’ Paying tribute to both traditional US strategic maladroitness, as well as the country’s saving virtue of pragmatism, over the Middle East America has had a tragic learning curve, but has at last gotten there: An over-emphasis on a regional swamp of declining relative importance must be corrected.
With the advent of the shale energy revolution and the dawning of the superpower contest with China, drawing America’s strategic attention ever more towards Asia, the US shift truly began during the presidency of Barack Obama. In 2011, the Obama White House began withdrawing troops from the sinkhole of Iraq. In 2014, in response to the never-ending war in Afghanistan, Obama positioned the US in a more passive training role there, increasingly leaving more of the fighting to the comically inept Afghan forces themselves. Finally, as a capstone, the Americans midwifed the Joint Comprehensive Plan of Action (JCPOA) between the great powers and the Islamic Republic of Iran, casting off highly effective global sanctions and bringing Tehran in from the diplomatic cold, in return for Iran halting its destabilizing nuclear program.
The overall strategic goal of this radically untraditional American regional policy was to allow the US to relatively do less in a region of decreasing importance, which has cost it so much blood and treasure, in order to concentrate more fully on Obama’s ‘Pivot to Asia,’ where much of both the world’s future risk (strategic competition “and even rivalry” with China) and future reward (the lion’s share of the world’s future economic growth) will be located.
Opting to ultimately serve as the region’s off-shore balancer, the Obama White House believed that after America left, the five indigenous regional powers (Iran, Saudi Arabia, Egypt, Turkey and Israel)—through the universal balance of power system—would create stability over time even as America headed to the door.
It was an elegant, new, creative strategy, but it did not survive the change in administration, both because incoming President Donald Trump emotionally hated all things Obama, and for the more strategically concrete reason that the JCPOA accord left a flourishing, undaunted Iran to pursue a renewed path of adventurism in the Middle East. Peace had not broken out, as Obama had so confidently predicted. Rather, America’s traditional enemies were on the march in the region.
America Changes Its Mind, Again
Contrary to the usual elite derision, Donald Trump’s Middle Eastern policy has been an interesting mix of the old and new. While rejecting Obama’s notion that the US should just largely walk away from its allies, Trump also (in ironic agreement with his nemesis) has no desire to over-emphasize the Middle East, or be bogged down in endless wars there.
Instead, Trump, while still desiring to continue Obama’s strategic de-emphasis of the region, only wishes to do so once American diplomatic moves have left US allies in a dominant position. Inverting the Obama strategy in the Middle East, Trump knows that an enduring, stable balance of power will not magically come to pass with a partial American withdrawal from the region. Instead, the US must create the conditions for such a balance of power by bolstering traditional American allies against a resurgent Iran. Only once such US-brokered stability is put in place can America then think of leaving.
It is precisely this new, Trumpian strategic rationale that neatly explains the past four years of US regional policy. First, Trump made it clear he intended to reinvigorate ties with traditional American allies, particularly the Sunni champion, Saudi Arabia, as well as the special relationship with Israel.
(This is an excerpt of Dr. Hulsman's latest article, which you can read here).
Dr. John C. Hulsman is the widely-read Senior Columnist for City AM, the newspaper of the city of London. Dr. Hulsman is also a Life Member of the US Council on Foreign Relations. His most recent work, the best-selling, To Dare More Boldly; The Audacious Story of Political Risk, was published by Princeton University Press in April 2018 and is available for order on Amazon. He can be reached for corporate speaking and private briefings at https://www.chartwellspeakers.com.
Week 19 - 25 October 202
October PMI Data To Hint To Stagnation
In DMs, October PMI data are expected to hint to stagnation, as: i) US indicators are likely to remain flat, with manufacturing at 53.4 (p: 53.2) and services at 54.0 (p: 54.6); ii) EZ manufacturing is likely to decline to 51.9 (p:53.7), while services are expected to recover into positive territory at 50.5 (p:48.0); and iii) Japan indicators are likely to show further decline, with manufacturing expected at 47.3 (p: 47.7) and services at 46.2 (p: 46.9).
Global Growth To Contract Less-Than-Expected; Central Banks To Remain Supportive
In its October WEO report the IMF projected global growth to fall by -4.4% in 2020 (p: -5.2%), up 0.8% from the June update. The upgrade in forecast is due to: i) less dire outcomes in Q2; ii) a stronger recovery in Q3; partly offset by iii)downgrades in selected EMs. In 2021, the IMF projects growth to rebound to 5.2% (p: 5.4%), -0.2% below the June projection.
In the US, before the November 3 elections opinion polls suggest President Trump keeps trailing his democratic challenger Mr. Biden (Trump 42% vs. Biden 53%). In the week ending on October 10, the number of ‘fillings for unemployment benefits’ rose by 898k (c: 825k; p: 845k), the highest in almost two months. The unexpected increase in jobless claims added to concerns about the labor market recovery, a day after Treasury Secretary Mnuchin said “getting a deal on coronavirus aid before the November election would be unlikely”.
Tensions between Beijing and Taipei rose, as China claimed “a US Navy destroyer sailed through the Taiwan Strait”. The US Navy stated it was a ‘routine Taiwan Strait transit’.
In Europe, UK and EU officials will continue to negotiate intensively in the hope of having a deal in time for the end of the transition period in December. In a joint statement, German, Italian, and French business organizations called on EU leaders to explore all possible options to seal a Brexit-deal with the UK, avoiding a “no-deal” outcome.
The Fed’s Chair Powell warned “the ongoing, tentative recovery from the pandemic recession could falter unless the federal government supplies additional economic support”. Mr Powell was speaking at the IMF’s annual meeting, while focusing on the subject of cross-border payments and digital currencies.
Real Economy: Growth Remains Wobbly While Geopolitical Uncertainties Remain
In the US, in September: i) retail sales rose by 5.4% y-o-y (p: 2.6%), the biggest rise in three months; however, ii) September’s IP fell to -0.6% m-o-m (c: 0.5%; p: 0.4%) – the first decline in five months, remaining 7.1% below its February, pre-pandemic level. In September CPI inflation rose by 1.4% y-o-y (c: 1.4%; p: 1.3%), the slowest pace in four months, as the inflationary shock from the coronavirus pandemic on the price of goods and services is starting to fade.
In the EZ, October’s economic sentiment index dropped by 21.6 points to 52.3 (c: 70.5; p: 73.9), the lowest since May. In September CPI declined by -0.3% y-o-y (c: -0.3%; p:-0.2%), the second consecutive month of deflation; core-CPI remained unchanged at 0.2% y-o-y (c: 0.2%; p: 0.4%).
Financial Markets: Sentiment Falls As Stimulus Hopes Diminish Further; Bonds Flat; Oil Up
Market drivers: weakness stemmed from: i) a continued stalemate in stimulus talks; ii) a rise in COVID-19 cases; and iii) worries over implications for the reopening of the economy.
Global stocks fell w-o-w (MSCI ACWI, -0.3%, to 583); the S&P 500 rose slightly (+0.2% to 3,484), due to mega-cap technology stocks. Stocks in Europe fell on: ii)raising coronavirus infections; ii) Brexit-related uncertainty; and iii)dissipating prospects of US fiscal stimulus before the November 3 elections (Eurostoxx 50, -0.8% to 3,245). Volatility rose w-o-w (VIX S&P 500, +2.4 points to 27.4, 52w avg.: 26.5; 10y avg.: 17.3).
Fixed income: w-o-w global bond returns rose slightly (BAML Global, +0.4% to 298.5); in the US, UST yields fell (UST, -3 bps to 0.74%), due to the Fed’s purchases of US government debt.
FX: w-o-w, the USD gained against most currencies (DXY, +0.7%to 93,682; EUR/USD, -0.9% to 1.172); the TRY remained under pressure, falling further (USD/TRY -1.1% to 7.857) due to a rising current account deficit (August: ~USD 4.6bn).
Commodities: oil prices remained steady (Brent, +0.2% to 42.9 USD/b) due to uncertainty over future demand, stemming from surging Covid-19 cases. Gold fell (-1.6% to 1,899 USD/Oz.) – weighed on by a stronger USD.
Copyright © 2017 - 2020 Rosa & Roubini Associates - All Rights Reserved.
Rosa & Roubini Associates Ltd is a private limited company registered in England and Wales (Registration number: 10975116) with registered office at 118 Pall Mall, St. James’s, London SW1Y 5ED, United Kingdom.