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Weekly Risk Outlook

European Central Bank President Mario Draghi at the World Economic Forum

European Central Bank President Mario Draghi at the World Economic Forum.

ECB President Delivers Remarks Following Signals of Further Stimulus

On Monday, European Central Bank President Mario Draghi will speak at a conference in Eschborn, Germany to explore his insights on the EU economy and ECB policy priorities. This will be followed on Friday with an initial look at Eurozone inflation figures for the month of January.

Following December’s low 0.2 percent rise in consumer prices for the Eurozone, the ECB will face increasing pressure to expand stimulus to lift inflation closer to the 2% target. The significant fall in oil prices has depressed consumer spending in the United States, EU, and Japan, leading policymakers to grapple for a solid response to move to a sustainable 2% inflation rate.

Concerns that China’s economy is underperforming, as a major economic shift from production to consumption is underway, mixed with falling growth estimates across emerging economies, low oil prices and rising geopolitical instability, have accentuated challenges that the ECB, Federal Reserve Bank, and Bank of Japan will need to respond to.

Yet central banks seem less potent to do so. With interest rates already extremely low (and in some places negative) and a number of stimulus packages both from the BoJ and ECB that have shown mixed results, central banks have become less reliable as heavy lifters to bolster their countries’ economic prospects.

As a result, although Mr. Draghi may push for further stimulus from the ECB and temporarily lift European stock markets, it will likely be insufficient to lift the European economy, absent any significant policy changes.

Iranian President Travels to Europe as Iran Re-enters the International Community

On Monday, President Hassan Rouhani will visit Italy to attend a business forum and meet with Pope Francis. This will be followed on Thursday with a trip to Paris where he will meet with President Hollande, and conclude his visit with a joint press conference.

Although Iran continues to be sanctioned by the international community for its human rights policies and support for terrorist groups, the lifting of Iran’s nuclear sanctions (freeing billions in Iranian assets and made selling oil in global markets difficult) has largely been viewed as Iran re-entering the international stage.

President Rouhani will have two major goals in mind when travelling in Europe: first, he will need to confirm that sufficient goodwill exists among European states (particularly France and Germany, two of the six negotiating states in the Iranian nuclear deal) to confirm Iran’s elevation from pariah status, given significant opposition to such elevation by the United States.

Second, and perhaps just as important, President Rouhani will need to show the Iranian population that pursuing a more moderate policy can have tangible benefits to the Islamic Republic, particularly in lifting the economic potential of the country.

This is vitally important, both in maintaining the core elements of the Iran deal, and practically speaking, because major elections next month will help to determine whether the more moderate policies pursued by President Rouhani and Foreign Minister Javad Zarif can be sustained against persistent opposition on the part of the country’s hardliners.

Bank of England Officials to Testify Before Parliament

On Tuesday, Bank of England Governor Mark Carney, as well as other senior officials, are set to testify before the British Parliament regarding BoE Financial Policy Committee’s (FPC) December Financial Stability Report.

The report, which highlighted a strengthening UK economy and an improving situation in housing, also noted that the FPC is likely to consider raising the counter-cyclical capital buffer (currently at 0%) following an upcoming report from the Prudential Regulation Authority.

Interestingly, this will probably lead to questions from MPs regarding whether a) such a measure would be sufficient in further strengthening the resilience of the banking sector, and b) if it could reduce British banking competitiveness or could create downwind costs for consumers.

Such a capital buffer is likely to be unique when compared to capital buffer requirements in other countries. The Committee has noted its intent to vary the required buffer “according to changes in [the Committee’s] view of the risks of potential losses on banks’ UK exposures.”

Although the FPC criticizes more rigid capital requirements as inefficient in its report, shifting capital requirements may create uncertainty in the banking system and could lead banks to hold higher levels of capital regardless of the requirement in anticipation of an unexpected buffer hike.

In addition, the report also noted the FPC’s concerns regarding cyber threats to the British financial and banking system. How this will play out as the UK undergoes a major discussion of cyber and government policy that has already created a storm of controversy, remains to be seen.

Conferences Will Highlight Oil Price Collapse and its Ramifications

The oil industry has a lot to discuss these days. A series of conferences this week across the world will focus on how the collapse of oil prices will affect both the industry as well as the economic environment of major oil-producing countries.

On Monday, Chatham House will host the Middle East and North Africa Energy Conference, which is slated to include OPEC Secretary General Abdalla El-Badri.

On Tuesday, Mexico’s oil and gas market will be assessed with the Energy Mexico 2016 conference in Mexico City. Also on Tuesday, Kuwait will host the Energy Strategy Forum in Kuwait City.

These conferences, as well as a vote on Wednesday by Royal Dutch shareholders regarding whether or not to absorb BG Group LLC (in one of the largest takeover bids in oil industry history), will bring together voices from across the major oil producing countries to access likely market projections for 2016 and beyond.

A major point of concern across the major oil-producing countries is the impact of persistently low prices on oil states’ macroeconomic environment.

Although Venezuela, Russia, and Nigeria have been discussed extensively as suffering particularly from low oil prices, other countries like Ecuador, Mexico, Indonesia, and even Norway have had to increasingly tighten government budgets in response to oil prices that have yet to find a floor.

Maintaining stable exchange rates with the strengthening US dollar has also bitten into currency reserves, and the low oil prices have led in some countries, notably Saudi Arabia, to enact major shifts in government policy that could have significant geopolitical consequences.

Bank of Japan May Surprise with Monetary Policy Shift

On Friday, the Bank of Japan will announce monetary policy for the month of January. Although the BoJ is not expected to alter interest rates–which have not effectively changed since 2011–the bank may decide to expand its quantitative easing program.

A Bloomberg survey of economists showed division over whether the BoJ would expand QE, with 17% expecting a QE expansion and the remainder either uncertain or believe the program will not change in January.

Although Japan’s inflation rate is similar to Europe’s and increasingly the U.S. (that is, nearly 0), quantitative easing may turn out to not be sufficient.

Japan has embarked on numerous QE expansions over the course of the past 2 years, and although inflation rose to respectable levels in mid-2014, it has since fallen to near 0.

Although inflation may not be answered effectively by additional stimulus from the BoJ, the Bank may expand spending regardless in an effort to encourage investment in Japan’s economy and help prevent the significant gyrations that have troubled Japan’s stock market over the past several months.

This article was originally published by Global Risk Insights and written by GRI analyst Brian Daigle.

 

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