Executive summary
- ECB's turning point – after ten hikes it is finally time to stop. We expect the ECB to refrain from further tightening at its next meeting on 26 October, with the deposit rate remaining at 4.0% due to an uncertain economic outlook and more restrictive financial conditions. Discussions may touch on an acceleration of quantitative tightening and an increase in minimum reserves, but significant changes are unlikely at this point, given increased fragmentation risks.
- Mercosur and the EU – finally closing the deal or breaking up? EU and Mercosur negotiators are working towards finalizing a trade deal that has been in the making for 20 years, but environmental concerns pose a challenge. A rough estimate shows that both regions can benefit from the agreement (USD5.1bn USD3.9bn in additional annual export gains for Mercosur and the EU, respectively). Brazil is likely to gain the most, with estimated additional exports of USD4.2bn per year.
- Argentine elections – dollarization won't save the day. The political frontrunner, Javier Milei, for this week’s presidential election has advocated a full dollarization of the economy. Albeit being a good political pitch, the reality check is that its implementation alone is no insurance against further crises. An orthodox policy mix would be more efficient and less costly, but the political will is still lacking.
- Poland elections – winds of change. Three pro-EU opposition parties from center-left to center-right, which have pledged to end the eight-year tenure of the PiS government, won a majority of parliamentary seats in the general elections last Sunday. A change of government is likely, providing the opportunity to unlock EU funds of up to 14% of GDP over 2024-2027, which would boost investment and growth.
- Chinese equities – big potential hindered by geopolitics. Although both macro and microeconomic analyses indicate an attractive picture for Chinese equities with over 10% upside potential to return to fundamentals, geopolitical risks, a deteriorating business climate and a strong USD discourage foreign investment.