EC The Investment Climate: Where We Stand

 

 

One of the most important forces shaping the investment climate is that the US is closer to beginning to normalize monetary policy than other major countries and regions. That gap may be measured in years, not months or quarters, and has not reached the apogee. The Federal Reserve will likely hike rates in the next six months, while other major central banks, from Beijing and Tokyo and Sydney, to Frankfurt and Stockholm, that are providing monetary policy for nearly 2/3 of the world economy are still committed to easing policy.

Since the middle of March, doubts have grown about the how close the Federal Reserve really is to raising rates. Stronger data from the euro zone and flows into the European equities also served to stem the dramatic dollar rise in Q1. A recovery in commodity prices and doubts about the Fed enticed flows back into emerging markets since late in Q1.  

The investment climate will become more treacherous in the coming months. Several key issues are going to come to a head. Chief among these is whether the US economy strengthens sufficiently to provide the Federal Reserve with the opportunity that it is looking for to begin to normalize monetary policy. The Federal Reserve regards the headwinds that slowed the US economy to be temporary. This needs to be born out in the data. Continued improvement of the labor market is a clear prerequisite.  

June is the first opportunity for the Fed’s lift-off. The weakness in Q1, which follows a now familiar pattern, has spurred a shift in expectations further out.  Since the recovery began in 2009, US growth in Q1 has singularly been disappointing, averaging 0.6% at an annualized pace. The average growth of the other quarters is 2.8%. September is understood to be the next such opportunity. 

The US handled China’s initiative for the Asian Infrastructure Investment Bank poorly. It served to strengthen the sense in some quarters that US global leadership is waning. There are two issues that will be decided in the coming months that will be seen in that light. Will the US trade initiative, the Trans-Pacific Partnership, come to fruition? If Congress does not grant the President trade-promotion authority, without conditions that antagonize the potential partners, the probability of a successful conclusion diminishes considerably. 

The other issue involves the future of the US Export-Import Bank. Will its life be extended beyond the end of June when the current authorization expires? Many Democrat constituencies have long been opposed to this socialism for businesses, where the government helps provide loans to foreign investors to purchase goods from US companies. What is new is that many Republicans are opposed. A compromise was forged last year, but now the supporters seem weaker and attention diluted by competition from other priorities. Ironically, China has recently indicated it will boost the funding of its Ex-Imp Bank by roughly $25 bln. 

The existential challenge to the irreversible European Monetary Union posed by Greece led by the Syriza government will be brought to a head. Negotiations for the first half of the four-month extension have results in recriminations on both sides. The end of June appears to be a hard deadline, and it is not clear that Greece has the money, or it banks the solvency, to last until then. 

There is no easy solution, but the failure to do so with Greece remaining within a monetary union, would be both economically and politically costly. Where Greece went in 2010, others followed. The debt overhang in Greece is but an extreme mutation of the virus that ails nearly every member of the euro zone (not mention among the major industrialized countries and many leading emerging markets, including China and Brazil).