Here are some critical issues to watch around the globe over the coming month:

North America

In the US, months of campaigning came to an end with Democrats breaking the Republicans’ grip on power by securing a majority in the House of Representatives, retaking several state legislatures, and winning seven new governorships. The US stock market initially reacted positively to the divided government, however since then it has lost ground. Historically speaking and based on current dynamics we expect the markets to have a more positive tone in the foreseeable future.

President Trump has said he expects to raise tariffs on $200bn of Chinese goods to 25% from 10% at the beginning of the year. He also declared that he’s ready to apply a further round of levies on $267bn worth of imports, including iPhones and laptops, starting next year. If the threat materializes market volatility will increase and trade disputes will evolve to a trade war which will darken the clouds and increase the chances of a recession by the end of 2019.

The yield on the US 10-year Treasury note declined 11 basis points from early November to 3.07%, while volatility, as measured by the CBOE Volatility Index (VIX), rose to 20.8 from 18%.

Europe

British Prime Minister Theresa May has negotiated a draft Brexit deal with the European Union. The deal has been met with harsh criticism by both Conservative and Labour members, and it is likely that that those challenging her leadership will grow in strength and number. The pound jumped by 1.1% shortly after the announcement of the agreement, but the modest gains have since been wiped away. If the Agreement is not approved by the UK Parliament, we expect further pressure on the pound and UK equities which will make both more attractive.

Italy failed to meet a deadline to resubmit its budget plans to the European If Italy does not address its deficit spending, the Commission may consider launching an EDP–a disciplinary process that can lead to financial penalties. Despite not surpassing the maximum deficit spending of 3% of GDP, the Italian government falls well short of 60% of public debt to GDP while its spending proposals and tax cuts undermine the Eurocrats authority. Deputy Prime Minister Luigi Di Maio has said that Italy is open to lowering its deficit spending. Italian bond yields have edged down since the start of the month, as 10-year paper has seen a 7-basis-point drop to 3.41%. Its spread over the equivalent German bond yield — a widely watched measure of eurozone risk sentiment — is down 5 basis points at 306 basis points. When the matter is seen in combination with Brexit it represents a conundrum that could start the unraveling of the Euro endeavor, especially if a trade war with China erupts and US leadership becomes an AWOL (let’s not forget that it was the US Treasury Department and the US Fed that provided the moral suasion and the ammunition needed between 2009-2013 to keep the Euro together).

Global equities were lower for the month amid continued concerns over slowing global economic growth and the chaotic Brexit process playing out between the United Kingdom and the European Union. If the EU turmoil continues, European markets will fail experiencing an anticipated turnaround and the Euro will become even more susceptible to downward pressure despite the fact that as things are right now, it is the greenback that faces the downward pressure.

Asia-Pacific

For the first time in APEC’s 25-year history, Papua New Guinea (PNG) was forced to end the summit with leaders failing to agree on a communique. It was reported that four Chinese officials were removed from the office of the Prime Minister of PNG. However, the Chinese government has denied these claims. In contrast, the US, Australia, and Japan released a joint statement declaring together they will identify infrastructure projects for development and financing. Given US policy trajectory of “America first” we see little room of cooperation which will undermine further international trade.

The EU has flirted with placing sanctions on Cambodian garments. The EU would remove Cambodia from the Everything But Arms (EBA) preferential system. The EU is the largest importer of Cambodian textiles, and the clothing industry is the largest employer in Cambodia. The World Bank has warned that these sanctions would have major ramifications on the Cambodian economy.

India is set to miss its fiscal deficit target for the year ending March 2019 due to a shortfall in revenues and lower-than-targeted disinvestment proceeds. India’s 2019 fiscal deficit target has been pegged at 3.3% of GDP. Indian credit agencies have estimated that the actual deficit will be 3.5% of GDP. Given the bank tremors in India we cannot exclude the possibility of a Lehman day in India and thus recommend caution regarding exposure to India.

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