After a long period in which monetary policy has led markets, the baton has (at least in part) passed back to politicians over the last few months. After the surprise Trump election, yesterday saw the constitutional reform vote in Italy fail. Although expected, the margin of victory and strong turnout underscored a resounding loss for Prime Minister Renzi.
Moving 6,500km east, last week saw the first data release since India’s “demonetisation” (see details below). It is still too early to judge the impact of this measure and opinion is firmly split. On the one side, a number of economists have taken a negative view. They highlight:
Certainly, we agree demonetisation stands out as bold reform, carrying not insignificant risk. However, we believe much of the criticism fails to take account of the broader context – demonetisation is not occurring in a vacuum:
And this last point hints towards the principal risk. Such large-scale reform and management of currency walks a tightrope of positive change against faith in government. Just as we have spoken about in the past with respect to “helicopter money”, credibility is all important. If there is any sign of government acting nefariously or in self-interest, the process will unravel.
In conclusion, whilst the India story carries risk, we remain extremely positive. History teaches us that to unlock the underlying growth drivers of demographics, urbanisation and structural transformation, requires inclusive and quality institutions and government. The potential for such a combination in India is, in our view, unparalleled.
Last week, OPEC agreed its first price cut in 8 years (amounting to around 1% of global production and prompting a 16%+ rally in the oil price). We remain somewhat sceptical as almost all major oil producers are playing weak hands – they require any and all revenue and are therefore unlikely to stick to production targets. Former Saudi oil minister Ali Al-Naimi summarised it aptly on Friday commenting “Unfortunately, we tend to cheat”.
This week, the RBI in India meets on Wednesday, followed by the ECB on Thursday.DOWNLOAD THE FULL ARTICLE View All Global Market Updates