Morning Commentary: A Democratic Exercise

Foreign Exchange - Morning Commentary

A Democratic Exercise

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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The results from India’s election, the largest democratic exercise in the history of democracy, has wrapped up with PM Modi winning reelection.  In total, nearly 600 million of the 900 million eligible voters voted in an election that spanned five and a half weeks. 
India is a very diverse country with 22 official languages and thousands of regional and tribal groups. The hundreds of political parties fielding candidates reflects this diversity.  Because of the number of groups, it is rare for a single party to win an outright majority.  When PM Modi’s party did so in 2014, it was the first time this was done in 30 years.  From all indications, it appears that Modi repeated that feat again, giving him a strong mandate.   
What remains to be seen is which Modi will govern: the business friendly leader or the divisive nationalist. When Modi’s first term started in 2014, he came in with ambitious plans to boost investment and reforms.  However this most recent election cycle was dominated by nationalistic rhetoric.    
The path that Mr. Modi chooses will have implications around the world.  India is the fastest growing large economy. With the Chinese economy slowing, India is becoming an increasingly important pillar of global growth.  Should Mr. Modi choose to use his mandate to break down bureaucratic barriers to growth, this could help accelerate India’s economy towards double digit growth. 
  • Risk off sentiment continues to characterize the markets.  On the domestic front, a meeting infrastructure between Trump and Pelosi and Schumer broke down almost immediately.  Internationally, trade rhetoric continues.  With escalating tariff and non-tariff barriers rising on both sides, the possibility of a protracted trade war is rising. 
  • PMI data for Europe disappointed overnight.  Manufacturing PMI came in at 47.7 verses expectations for 48.1 and services PMI came in at 52.5 verses expectations for 53.0.  A reading above 50 implies expansion and a reading below 50 implies contraction. 
  • The GBP is down again this session and is setting new records for consecutive declines. The latest headline blow to PM May was the resignation of Andrea Leadsom, a senior minister.  Ms. Leadsom resigned as she no longer believed the government will honor the result of the 2016 referendum. 
  • EU parliamentary elections kick off today.  For the UK, the elections results are important as they serve as a proxy for Brexit sentiment.  For the EU, the election results will give insight into the stability of coalition governments (Italy, Germany). 
  • Fed meeting minutes released last night confirmed the Fed’s patience stance and confirmed that most officials say recent soft inflation as temporary.  This reinforces the notion that there isn’t much appetite for a rate cut.
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