Cameron Brandt, EPFR Director of Research, reflects on how he sees September unfolding:
With a third US rate hike year-to-date completely priced in for September, politics – which investors have been discounting for the past four to five years – will be the key driver of flows and markets in September. There will be three main focal points:
In the US, the mid-term elections will attract growing attention. A market consensus that the Democrats will regain control of the House of Representatives will take a lot of the steam out of the small business, small cap rally that has underpinned the above-trend growth in the US. President Trump’s protectionist, deregulatory agenda has fueled this segment of the US economy. If the market starts to factor in Democratic control of the Senate as well, which obviously increases the odds of a push to impeach Trump, there are further implications for US economic policy and the aggressiveness of Trump’s trade and foreign policies.
Brazil’s election in early October could stand one of the few reform stories left in the emerging markets universe on its head. If Latin America’s largest economy looks set to join the populist camp, sentiment towards emerging markets will take another major hit.
Italy’s new coalition government will start showing its cards as the deadline for presenting its draft 2019 budget moves closer. A direct challenge to EU and Eurozone budget rules could extend Europe Equity Fund’s current outflow streak into next year. I will also be paying attention to France, where Emmanuel Macron’s reform agenda is running into growing opposition. That has consequences not only for the French economy, but for efforts to reform the European project.