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Investment Bank

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Turning tables   

Aziz Sunderji, Zoso Davies, Juan Prada
 

  • The NZD underperformed after the NZ First Party announced it would form a government with Labour. Equities were down in Europe and little changed in the US. US Treasuries rallied after reports that Trump is leaning toward Powell for Fed chair. Asian markets were mixed to largely unchanged at midday local time.
  • New Zealand’s Labor party will form a government with NZ First Party. The change of government brings policy uncertainty, and concerns about curbs to immigration, potential changes to the RBNZ mandate, housing market and fiscal policy, which have weighed on the NZD. We do not believe the near-term path of monetary policy is likely to change and maintain our forecast of no change in interest rates until the end of 2018.
  • Catalonia announced that the regional Parliament may proceed with a formal vote on independence. Since the separatist government did not withdraw its suspended declaration of independence, the Spanish government replied that it now has no choice but to go ahead with the procedures for applying Article 155. We think regional elections are the most likely outcome within the next few months.
  • Last Sunday’s regional elections in Venezuela have deepened the political crisis. The government won 18 out of 23 governorships, in sharp contrast with polls that gave a 2-to-1 advantage to the opposition. Controversy over the results has deepened the divisions within the opposition, making a negotiation with the government even more difficult. Additional sanctions seem likely, but the strengthening of the government could support its capacity to get funding from allies.
  • Recent declarations by ECB officers point to a “lower for longer” extension of QE. We now expect the ECB to announce an extension of asset purchases for nine months, at a pace of EUR30bn, at the GC meeting next week. We maintain our call that the first increase in the deposit rate will come before the end of asset purchases, with a change to forward guidance in Q2 18.
  • EU leaders will discuss Brexit at the EU Summit today. The Council will be updated by Michel Barnier about the state of negotiations, and it is likely they will conclude that there has not been enough progress to move to the second phase of negotiations.
     
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