Economic & Strategy Viewpoint
In this month's viewpoint our economists discuss whether it is time to hit the panic button, the sterling's slide as political risk comes into focus and China concerns impacting emerging markets.
Global update: Time to hit the panic button? (page 2)
Falling oil prices and a further devaluation of the Chinese yuan (CNY) have contributed to a poor start for risk assets.
There are now fears that the US will drop into recession. Despite being relatively cautious on global growth, we believe these concerns are overdone, although we recognise that the biggest “known unknown” is whether the CNY will devalue significantly further.
The move in the CNY and the decision by the Bank of Japan to cut rates into negative territory in January highlights the tail risk of a currency war in 2016.
UK: Sterling slides as political risk comes into focus (page 7)
The British pound has been the worst performing G10 currency since the start of November.
In fact, the depreciation against the US dollar over the past two months was the worst since the global financial crisis in 2008. The direction of travel for sterling is not a surprise given the UK’s macro imbalances, but the scale of the drop has been larger than expected.
The fall in interest rate expectations appear to justify the fall in sterling. These are likely to be driven by falling oil prices, and the likely impact on UK inflation.
However, Brexit risk appears to be rising in prominence just as opinion polls tighten. While there may be traces of Brexit-related selling of sterling, we think there is scope for further depreciation if risks were to rise.
Emerging markets: China concerns (page 12)
Volatile markets in China have prompted an outsize global response. Equity gyrations on the mainland have little to no economic bearing.
Currency weakness is a bigger threat to the world, but a big devaluation still seems distant.