Global macroeconomic winds swirl, challenging the rosy scenario

Source: ECN


The global chemical sector is facing a whirlwind of macro forces. Between Italy’s new political crisis, Turkey’s plunging currency, US interest rate hikes, trade tensions between the US and everybody, and OPEC and Russia’s plan to boost crude oil output, all have the potential to impact chemical markets in a big way. Why not throw in Iran and North Korea as wild cards?

The latest crisis in Italy with the president rejecting the majority anti-establishment coalition’s choice for finance minister on the basis of being a eurosceptic has called the euro into question once again.

This upcoming election in the autumn or early 2019 may well be a referendum on the euro, causing instability for the currency along the way. Italy’s debt and equity markets plunged amid the latest poltical crisis, and the euro further retreated against the US dollar.

While a weaker euro offers competitive benefits for eurozone exporters, this can be more than offset by the rapid rise in yields (such as in Italy) from the falling bond market which makes borrowing more expensive.

And the threat of Italy leaving the euro is destabilising in itself. On the remote chance this actually happens, it would be catastophic for the currency and the European economy.

The same dynamic on currency depreciation and yield hikes applies to Turkey but on a greater scale for now. The Turkish lira has plunged 19% versus the US dollar year-to-date, and its financial markets took a dive last week as President Erdogan threatened to intervene in monetary policy after the upcoming election in July. The central bank this week raised rates to halt the lira’s drive, in defiance of the president. For those buying chemicals on the spot market, the currency volatility’s a “nightmare”.

The gradual but steady interest rate hikes by the US Federal Reserve are putting pressure on emerging markets in general, as they tighten credit markets abroad.

This not only tends to bring up borrowing costs worldwide, but US dollar appreciation also makes it more onerous to pay back dollar-denominated debt.

Every US Fed tightening cycle “causes a meaningful crisis somewhere”, noted Deutsche Bank macro strategist Alan Ruskin last week, as he highlighted the risks to emerging markets.

“Fed tightening can be likened to the monetary authorities shaking a tree with some overripe fruit. It is usually not totally obvious what will fall out, but that there is ‘fall out’ should be no surprise.”


While the global synchronous economic upswing is still in play, it is starting to become less synchronous. Although overall macroeconomic conditions remain favourable, the risks have clearly risen and some cracks in the rosy scenario are showing.

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