As we approach the end of 2018, it makes sense to identify those policy issues where progress has been made – and those that are proving particularly intractable. Success or failure will have major asset class return implications.

1. Attention in the U.S. is now focused on government funding, but continued wages growth could also be a longer-term concern.

In the U.S., the over-arching trade dispute with China has gone relatively quiet for now, putting the focus back on the federal budget, and the threat of an impending government shutdown. Looking beyond the immediate politicking around government funding, budget deficits remains a long-term concern for the U.S. The implications of continued wages growth (given a very tight labour market) for unit labour costs could be another, more immediate problem, as we discuss on page 2.


2. In Europe, further fiscal flare ups are possible, even if the Italian budget issue can be resolved. Brexit is also still far from resolved.

In Europe, the ECB has ended net purchases under its asset purchase program (APP, page 3) and we have had signs of movement on the Italian budget issue, with a revised 2019 budget submitted including a deficit target of 2% rather than 2.4%. But, just as the budget issue in Italy appears to be inching towards some sort of solution, fiscal issues are flaring up elsewhere – most obviously in France (page 2) where a very disappointing flash manufacturing PMI number this morning has further deepened the gloom. Protests against a fuel tax rise and against austerity in general have resulted in a raft of fiscal spending initiatives from the government which threaten to push the budget deficit to as high as 3.5% of GDP – well above EC limits. A reaction against austerity is evident in many other European economies, suggesting that budget overshoots could be a growing issue in 2019, given that a pickup in growth looks unlikely. And meanwhile, of course, the Brexit drama continues, with prime minister May’s survival of a confidence vote this week doing very little to resolve the major outstanding issues. In this situation, while the focus is still in theory on agreeing to a soft Brexit, risk scenarios are also coming increasingly under consideration.


3. Recent Chinese data continues to cast a shadow, but limited further USD upside will provide some relief for emerging markets.

Chinese industrial production and retail sales YoY growth in November failed to meet expectations, falling to multi-year lows. This suggests that Chinese government stimulus policies are yet to gain adequate traction. Emerging markets could however get some relief from only limited likely further USD upside in 2019, after a year when USD strength caused headaches for many of them. On page 9, we focus on the fortunes of the Indian rupee, now recuperating after a difficult 2018.


We wish all our readers a very happy holiday season. The next edition of the CIO Insights Bulletin will be published on January 11, 2019.


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