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Commentary

Mon 19 Nov 2018 / Europe

Five options if UK rejects May deal

UK Prime Minister Theresa May has clinched her deal with the European Union and persuaded most of her cabinet to support it. But after EU leaders sign off the deal at a summit on 25 November, May has promised the House of Commons a 'meaningful vote'; it is hard to see how she can win it. However, even if May falls, the arrival of a new Conservative party leader would not change the parliamentary arithmetic behind the Brexit deal. If parliament votes against the deal, there are just five possible outcomes.

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Fri 16 Nov 2018 / Asia Pacific

Renminbi's global reserve share rising

Asset class diversification continues to be a key theme for central bank foreign exchange reserves managers. Despite a weaker renminbi/dollar rate this year, the Chinese currency has increased its share in global reserves, according to IMF data. The latest report shows a jump in renminbi holdings of around $50bn in the second quarter of 2018. Less than a decade after the launch of the renminbi internationalisation initiative, we estimate that more than 60 central banks have renminbi in their reserves. But allocations are still relatively small.

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Thu 15 Nov 2018

ECB on brink of egregious policy error

ECB President Mario Draghi sees no need for the central bank to change course from its decision to withdraw monetary policy stimulus by concluding its bond-buying programme later this year. He does so despite growing signs of vulnerability in the European and global economies. Clouds are gathering over Italy, and it is possible that the UK will crash out of the EU without an exit deal by end-March 2019. Meanwhile, risks of a German economic slowdown have risen because of continuing trade tensions with the US.

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Wed 14 Nov 2018 / Africa

Zambia's infrastructure habit

Infrastructure development in Zambia is a powerful tool for swaying public opinion. However, despite its importance to economic growth, it is contentious. Past projects are associated with high costs, opaque tender processes and rising public debt. The tension between development and debt dominates, and the two issues often lead back to China and its funding of Zambian infrastructure projects. In a nation that emerged out of colonialism, fears of its reoccurrence in a different form are well founded.

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Tue 13 Nov 2018 / North America

Doves waiting in Fed wings

The rotation of voting members of the Federal Open Market Committee after its December meeting will bring to the fore outspoken doves, James Bullard of the St. Louis Fed and Charles Evans of the Chicago Fed, to balance out incoming hawks. Bullard made headlines in mid-October by calling for the Fed to stop raising rates and has proposed changed in how the Fed views the sustainability of current low unemployment and its effect on inflation. So far, the Fed has been able to raise rates because the economy has outperformed.

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Mon 12 Nov 2018 / North America

Rising external deficit 'made in USA'

As US external deficits widen in response to relatively strong US economic performance and imbalanced macroeconomic policies, there is a considerable risk the Trump administration could amplify its protectionist rhetoric and actions. Yet rising US trade and current account deficits are largely 'made in America'. The increasing divergence between the US and other major global economies, aggravated by the imbalanced US macroeconomic policy mix, remains the most striking aspect of the worsening currency confusion.

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Fri 9 Nov 2018 / North America

US midterms fulfil market expectations

The results of the 6 November US midterm elections illustrate how President Donald Trump remains bound to historical norms around US voter preferences for shared power. That is the central insight from this result: the loss of total Republican control of Congress should somewhat constrain Trump's potential for erratic behaviour. The initial market reaction has been positive, as the outcome fulfilled expectations. While the chance of gridlock in Congress is higher, the result also reduces the probability of negative policy surprises.

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Thu 8 Nov 2018 / Europe

Merkel can help Christian Democrats

German Chancellor Angela Merkel bequeaths a political legacy that leaves leadership of Europe's most powerful economy in less than wholly secure hands. The result of her manoeuvring is a country with seven major political parties competing in parliament. Those bidding for Merkel's job will need to keep an eye on a possible revival of the earlier-considered four-party coalition. If the Social Democrats leave (or are pushed out of) the 'grand coalition' next year, Merkel's successor will have another chance of forging a new constellation.

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Wed 7 Nov 2018 / Asia Pacific

China cooling spreads beyond borders

The Shanghai Composite Index tumbled by more than 9% in October, and has shed 25% for the year. To determine the probability of a cool down, one must look at the money supply, broadly measured. The relationship between the growth rate of the money supply and nominal GDP is unambiguous and overwhelming. It is unsurprising that Chinese stock markets have been rattled. Moreover, as China has for some time been the biggest contributor to world growth, the cooling spreads beyond the country's borders.

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Tue 6 Nov 2018 / Europe

Country risk from credit derivatives

Countries swapping their foreign currency debt back into their own currency or their domestic debt are as much at risk from credit derivatives as investment banks were 10 years ago. If one counterparty defaults, this could be a huge cost to the other. Most market participants agree to pay some form of collateral when the value of the swap moves one way or another. However, most countries cannot post collateral.

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