From Paul Donovan of UBS Global Macro Team
The Rise Of The State
Governments are encroaching into more and more areas of the world economy. This is not just through political drama (as we have seen in the Euro area), nor even through the conventional mechanisms of foreign exchange intervention. Regulation (and regulatory uncertainty), sovereign wealth funds, bond market manipulation and default risks all play a role in financial markets, and all are intensely political in their nature.There Is No Place Like Home
A more politically nuanced world raises an interesting unintended consequence for global financial markets. Directly, as a result of increased regulation, or indirectly, as a result of increased costs associated with assessing foreign political risk, investors may feel that the rise of the state will increase the home country bias of capital flows – exactly as leaders look for global burden sharing.The Euro
The Euro continues to represent a mass of political risks, most of which are of course divorced from conventional political assessment. The Euro area is struggling with regulatory, default, and fiscal risk of course, but also with negotiations over the de facto surrender of sovereignty for the collective good of the monetary union. The problems here are changing so frequently it seems useless to speculate on specific outcomes. However one concern is that political and economic objectives are not necessarily coinciding.Forthcoming elections
Even amidst the specific concerns of the Euro, the electoral calendar does contain some important dates. Spain goes to the polls in November, with polls indicating a new government is likely. New Zealand also has a general election, and Egypt is supposed to begin its process of transition to democracy – albeit slowly.