The market over the summer has been quieter than we had expected - thanks to Draghi's threats placating-words and Bernanke's promises. Equities rallied, Bunds and Treasuries sold off, and government spreads in Europe declined. All these markets look more constructive. However, the event calendar in the near future is very heavy, notably the political one. This article from UBS' global strategy group does three things. First, they provide a list of events until the end of the year. Second, the relative importance of the various events are ranked; and finally, they provide, where needed, a comment on what to expect.
We still believe three topics will drive markets: (1) the ongoing European sovereign crisis, where we see some progress (albeit slow) as Draghi has pushed forward his agenda and found some support from politicians; (2) the political issues in the US, although the main change is the more dovish Fed; and (3) world growth, which has been disappointing and is a major risk to monitor.
Issue #1: European Sovereign Crisis
After the positive performance of markets, we are more nervous. The political calendar (see below) is very heavy and will provide plenty of opportunities to disappoint markets, or at least provide uncertainties on which attention may be focused. The issue is not only about a potential adverse outcome, but also and maybe mainly about political action being too slow for markets. For instance, the ECB suggested it would wait until Germany’s Constitutional Court ruling (due September 11th) before unveiling its plan to purchase government bonds. We are thus about a month away from clarity on that topic.
Issue #2: US political moves
There are many dimensions to look for in the US. This includes the upcoming US elections but also, obviously, the fiscal cliff and the debt ceiling.
Issue #3: Global growth
Although much attention is being paid to the above-mentioned political developments, the key risk might actually be growth. Recent data points have confirmed that growth is weak in most parts of the world. We believe this is the main reason why a number of central banks have already reacted (BoE) or are planning to (Fed, ECB). Weaker growth would make the fiscal consolidation in the developed world much more difficult and lead to renewed market stress.