The following is a freely accessible summary of a published Citi Research report.
In a new report from a team led by European economist Christian Schulz, we preview the upcoming EU elections, which will elect 720 Members of the European Parliament (MEPs) to five-year terms from national lists weighted by population according to proportional representation. Polls suggest a swing to the right, away from the Greens and Liberals, and while EU Commission President Ursula von der Leyen looks set to stay on, the Green Deal may wind up being watered down, with a new focus on defense, immigration and reducing the EU&rsquo;s footprint in European policymaking.
The EU operates like most Western parliamentary democracies, with a parliament effectively made up of two houses. The European Council forms the lower house, and can be thought of as the &ldquo;Chamber of States,&rdquo; as each Member State has one seat (though not necessarily with equal voting rights) and is represented by its national leader or government. The upper house is the European Parliament, which can be understood as the &ldquo;Chamber of People,&rdquo; since its members are directly elected. Power is unambiguously skewed toward the lower house, both in terms of law-making powers and all matters in which EU monies are involved, and the composition of the EU Commission &mdash; the executive body of the EU &mdash; is derived from the Council, not the Parliament. As a result, the impact of the European elections is more indirect than direct. The elections offer a reflection of public opinion, not just across Europe but also within individual countries, and this can increase or decrease the political capital in the hands of the Council&rsquo;s members.&nbsp;&nbsp;
Hundreds of political parties will be in the running for the 720 seats, with 212 having made the cut in 2019&rsquo;s vote. These national parties will then align with like-minded parties from other member states to form parliamentary groups. That&rsquo;s a much looser arrangement than groups found in national parliaments, but the groups have established some common views and priorities for the next five years, and some have nominated lead candidates, known as Spitzenkandidaten, for the post of EU Commission president.
Here's our quick overview of the major groups: The Left&rsquo;s goals include better employment and social rights, a fair wealth distribution, stronger environmental protections and equal pay. The Greens/EFA reject fiscal austerity and reformed fiscal rules, and demand post-2030 climate targets and a &ldquo;human&rdquo; migration pact. The Social Democrats&rsquo; priorities include more EU-wide regulation of the housing markets, strengthening women&rsquo;s rights, greater environmental spending and more EU-wide social and labor rights. Renew Europe favors using EU funds to promote the rule of law and enforce human rights while supporting the Green Deal. The European Peoples Party (EPP) is focused on more investment in Europe&rsquo;s defense industry, tougher immigration controls, deregulation, and a more &ldquo;realistic&rdquo; approach to climate neutrality in 2050; its Spritzenkandidat is von der Leyen, the current Commission president. The European Conservatives and Reformers (ECR) want &ldquo;less Europe&rdquo; in order to strengthen member states and to reduce the &ldquo;cost of Europe,&rdquo; such as by shrinking its institutions or stopping climate-change policies. Identity and Democracy is focused on being tough on immigration, opposes EU membership for Turkey and advocates stronger national parliaments and national referendums.
Polls show shift to right
In 2019, big wins by the Greens heralded a focus on the Green Deal, a set of European Commission policy initiatives aimed at achieving EU climate neutrality by 2050. Five years later, we see the pendulum as swinging back. Von der Leyen&rsquo;s EPP seems clearly in first place according to polls, followed by the Social Democrats, with a wide-open competition for third place. The Greens seem likely to be the big losers from the elections. As a caveat, groups&rsquo; composition can change, impacting the final ranking.
At least at the start of the legislature, the groups&rsquo; main aim will be to influence the distribution of posts across European institutions; one of the parliament&rsquo;s key powers is its right to approve and dismiss the EU Commission. The Council proposes the candidates, with Parliament&rsquo;s groups trying to influence the choice of president by naming Spitzenkandidaten and agreeing to approve the Commission on the condition that the Council accepts the winning party&rsquo;s candidate as president.
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&nbsp;
We think von der Leyen should be in a strong position to be re-elected if the EPP remains the largest party in parliament, as polls predict. When our note was written, 14 of the 27 EU member states were represented by EPP politicians, though the EPP leaders only represent 27.6% of the EU population, and none of the &ldquo;Big Four&rdquo; of Germany, France, Italy and Spain. To gain the necessary 65% majority, von de Leyen will need support from the Social Democrats (who represent 31% of the population) as well as from Renew Europe (22.6%). Other key positions will include the presidents of the European Council and the European Parliament.&nbsp;&nbsp; &nbsp;
Impacts on EU and national politics
Individual leaders&rsquo; political capital stems in part from whether the policies they advocate win or lose votes in domestic elections. So, for instance, French President Macron may have more difficulty gathering support across the continent for more concentration of federal power if the Renew group sees large losses across Europe and more particularly in France, while Italian Prime Minister Meloni may have more leverage if the ECR sees strong vote gains. We see Meloni as a person to watch given these elections: Von der Leyen has already made clear that she will cooperate with her, and if Meloni&rsquo;s Fratelli d&rsquo;Italia party moves from the ECR to the EPP, she could have significant sway over EU positions.
What&rsquo;s on EU voters&rsquo; minds? Immigration remains the most pressing issue, but its importance has waned since peaking in 2015. Climate change and its environmental impacts have also begun to fade as a perceived EU priority, in favor of high inflation. Energy surged to become a top priority in 2022, but has since dropped back in voters&rsquo; minds. Meanwhile, a recent poll shows more than 75% of European voters favor a common defense and security policy at the EU level and think the EU should reinforce its military capacity. And EU voters&rsquo; trust in the EU has significantly improved since the pandemic.
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Upcoming debates for the next term could include the prospect of enlarging the EU and reform of its current voting processes; the 2028-2034 fiscal framework; completion of a banking and capital-markets union; greater defense integration; free trade and supply-chain issues; the push and pull between the Green Deal and cheap energy; and asylum policies.
&nbsp;

Existing Citi Research clients can follow <a href="https://www.citivelocity.com/t/eppublic/37KjE" target="_blank" rel="noopener" data-link-source="tiny">this link</a> to access the full report, which also includes a nation-by-nation look at implications of the elections and a discussion of potential impacts on equities.

The Greens' big wins in 2019 heralded the Green Deal under the von der Leyen Commission; five years on, polls show a sharp swing in popular support to the right. A new Citi Research report previews the elections, explaining why the Green Deal may wind up being watered down even though Ursula von der Leyen looks set to stay on as EU Commission president.

EU Election Preview: The Pendulum Swings Back?

The following is a freely accessible summary of a published Citi Research report.
President Macron&rsquo;s decision earlier this month to dissolve the French National Assembly and convene snap elections could have far-reaching consequences not just for France but also for Europe.
In a new report led by Arnaud Mar&egrave;s, we explore what we see as a clear and present risk that France finds itself either with a government generally opposed to policies being determined at a continental level, or with a deadlocked parliament that can&rsquo;t ratify any meaningful policy initiatives. Such outcomes would arrive at a time when a non-cooperative stance from France could prevent the European Union from accelerating policies related to energy, defense, industry and trade that it absolutely needs if it&rsquo;s to keep up with other global powers.
France&rsquo;s legislative elections will take place in two rounds on June 30 and July 7, and consist of 577 individual elections. Any number of candidates can take part in the first round, with candidates receiving more than 50% of the votes winning their elections. Should that threshold not be reached in a given race, the two leading candidates and any candidate who received votes equaling or exceeding 12.5% of the number of registered voters advance to the second round. The higher the participation rate, the more three- or four-way races may take place in that second round. Another point to consider: France&rsquo;s constitution forbids any dissolution similar to Macron&rsquo;s June move within a year of the new election. When holidays are taken into account, that means whatever parliament emerges will remain unchanged until at least September 2025.
Viewed through an institutional lens, three outcomes are possible. We&rsquo;ve chosen to describe these outcomes generically before mapping them against the current state of French politics.
The first possibility is a standard majority government, with the president&rsquo;s party winning an absolute majority in the National Assembly, which would lead to the president appointing a prime minister.
A second scenario sees the president&rsquo;s party fail to achieve an absolute majority in the election but then assemble one through a coalition of parties. This would lead to the appointment of a prime minister to lead this coalition.
In our third scenario, either a party other than the president&rsquo;s or a coalition excluding the president&rsquo;s party achieves an absolute majority. This is known as cohabitation, with the president compelled to invite the candidate designated by the leading party to form a government. France has seen periods of cohabitation before, and it can be a relatively stable arrangement: The government controls most areas of policy, but the president retains at least notional control of &ldquo;reserved&rdquo; powers, including many public appointments, and represents France in the European Council. The stability of such an arrangement depends on how aligned the president and government are on matters of defense and international relations.
A fourth scenario would be unprecedented since 1958: No party commands a majority, and no coalition can emerge. Such a deadlock would leave an appointed prime minister either unable to pass meaningful legislation or facing a no-confidence vote. As there are limits on how many no-confidence votes a member of France&rsquo;s parliament can support, within a matter of months members of parliament would be unable to bring the government down and the government would be unable to take meaningful policy steps domestically or contribute to European policy decisions.
Those are the possibilities. How will the elections play out in practice? That&rsquo;s made more complicated by the blurry boundaries between France&rsquo;s political forces.
Numerous leftist parties have come together to form an electoral alliance, which increases the likelihood of individual candidates being elected but doesn&rsquo;t assure unity once they are. We see the differences between the various parties as too pronounced and too deeply rooted for a leftist alliance to survive long past July 7.
In the center, Macron has historically gained support from an aggregation of individual parties that have proved reluctant to dilute their individualism and become a single established party. A severe defeat for Macron could see these parties split and go their separate ways, variously left and right.
The far right (RN) appears as a more stable bloc.
Polls suggest France is extremely divided: RN scores a relatively stable 30% to 35% of the vote; the left alliance is polling at 25% to 28%; Macron&rsquo;s coalition is at 18% to 20%; and the conservatives (LR) poll around 7%. Polls generally project RN missing out on an absolute majority (289 seats) by at least 30 seats, with left ending up with 150&ndash;200 seats and the incumbent center being reduced to around 100 seats. But RN might be able to reach the 289-seat threshold in a coalition with LR members. We attribute a subjective probability of 40% to an outright RN victory, with the same probability of an institutional deadlock and a 20% probability of a broad coalition emerging from the center. At the moment we see no realistic chance of the left alliance winning an outright victory. Turnout will be key, with high turnout possibly favoring extremes, more specifically the far right.
As for what&rsquo;s at stake, at the domestic level public finances are a source of primary concern. We don&rsquo;t see how any outcome avoids a further deterioration of France&rsquo;s fiscal trajectory: The far right professes little interest in abiding by European fiscal rules; deadlock offers no realistic possibility of curbing expenditures; a centrist coalition would be a reluctant one that would want protection from financial restraint for core electoral clienteles; and if a leftist alliance did somehow win, it would certainly opt for large increases in public expenditures.
But we see the stakes of this election as more consequential for Europe. The continent has entered a critical period of its history, with a laissez-faire attitude toward markets giving way to increased emphasis on industrial policy, strategic choices and a more defensive approach to international relations. To avoid jeopardizing its long-term economic potential, the European Union must assume national governments&rsquo; prerogatives on matters such as energy policy. Either institutional deadlock in France or the arrival of a government generally hostile to such pooling of powers could stall Europe&rsquo;s efforts.

Existing Citi Research clients can follow <a href="https://www.citivelocity.com/t/eppublic/39OyK" target="_blank" rel="noopener" data-link-source="tiny">this link</a> to access the full report.

A new Citi Research report explores two baseline scenarios for France's elections: a deadlocked parliament and an outright victory for the far right. Either could disrupt not only France's fiscal performance but also Europe's ability to accelerate its transformation at a time of rapid geopolitical and economic change.

A User’s Guide to France’s Elections

The following is a freely accessible summary of a published Citi Research report.
In a new Citi Research report, Benjamin Nabarro and team look at the historic landslide victory for the UK&rsquo;s Labour Party. The 174-seat majority (our report used exit polling&rsquo;s prediction of 170 at the time of publication) is marginally less than 1997, but a larger overall swing in the number of seats; Labour has recovered from their weakest postwar performance to come close to their strongest. Besides Conservatives&rsquo; losses, the other significant stories were a large boost for the Liberal Democrats, a loss for the Scottish National Party (SNP), and an unexpectedly strong performance for Reform. By way of historic perspective, the Labour seat gain is the highest since 1945 and the Conservative seat count is now below the party&rsquo;s previous 1906 nadir, with the lowest share since 1832.
<img src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/6694efa92e7d172fb0b3af45.jpg">
Looking at the initial results, we noted two clear shifts. The first is the substantial swing towards Labour away from the Conservatives in a conventional sense. The second is that Labour&rsquo;s strength was boosted by the rise of the right-wing populist Reform party and the split of the right-wing vote. Of seats that voted Conservative in 2019, the exit poll showed an 18-percentage-point (pp) rise in support for Reform and a 28pp drop for the Conservatives. The UK&rsquo;s first-past-the-post electoral system then compounded Conservative losses.
That means that while the result may be robust, the direct endorsement of Labour&rsquo;s agenda may be somewhat less emphatic than headline numbers would suggest, a factor also compounded by turnout that initial numbers suggested had fallen. The challenge now for Labour is solidifying underlying support to match the scale of the swing in seats.
For fiscal policy, the results did little to change our expectations. We had expected a robust 120&ndash;150 seat majority; a marginally stronger outcome further boosts the authority of Labour&rsquo;s leadership. Now that it&rsquo;s secured a robust majority, we think Labour should plan for a full five-year parliament. Given its difficult fiscal inheritance, utilizing the associated flexibility will be central to its re-election prospects. This suggests a relatively tight fiscal approach upfront, which would create policy space for later in the parliament and also accelerate disinflationary processes that should, in turn, enable rates to fall.
Therefore, we think existing fiscal tightening will continue as planned into the 2025 and 2026 fiscal years. We also see further revenue increases as likely come Labour&rsquo;s first fiscal event. This will likely weigh on growth at first, before rates driven lower and more public spending enable a robust improvement in the economic trajectory from 2026 onwards.
After a flurry of initial legislation and a delayed summer recess, we see fiscal announcements likely in October at the earliest, after the party conference. We expect a tight one-year interim spending settlement ahead of an autumn budget, before a dialing up of spending later in the parliament as more fiscal space becomes available. In part here, we continue to think Asset Purchase Facility reform is likely over the course of the parliament. But that&rsquo;s a rather complicated shift that we don&rsquo;t expect to come until fiscal 2025 or 2026, or even afterwards.
Reform saw its leader Nigel Farage win in Clacton, giving the party a prominent Westminster presence. And the party clearly took a substantial share of the popular vote, especially in Conservative-supporting areas. For the Conservative Party, the question now is whether to do some kind of deal or go it alone. Conservatives such as former Home Secretary Suella Braverman and figures such as Jacob Rees-Mogg have argued for bringing Farage into the party, while the likes of Kemi Badenoch and former PM Boris Johnson have argued against it.
Regarding the EU agenda, an implication of the split in the right-of-center vote is that Reform is now the second-placed party in many Labour seats, especially in regions such as the North East. We continue to think Labour will make progress on its supply agenda, including the adoption of a more proactive industrial strategy. An easing of trade frictions with the EU will likely be part of the story around growth, but we think Labour will progress only with caution. We think free(er) movement &mdash; which would probably be required to achieve more sweeping improvements in the trading relationship &mdash; remains unlikely in this parliament.
We see the SNP&rsquo;s poor performance pointing to waning risks around independence. An SNP government in Holyrood will still likely push the case, but with weaker representation in Westminster we expect it will be difficult to make discernable progress. Overall, we think the risks of a second independence referendum have fallen notably, at least for the near- to medium-term.
The results boost our conviction that the UK has the necessary near-term clout to navigate legacy challenges associated with the pandemic&rsquo;s fiscal and social overhang. We also think the scale of Labour&rsquo;s majority adds to the momentum behind supply-side reform. Both are reasons for economic optimism in the medium term.
But the rise of Reform (and, to a lesser extent, the Greens) also speaks to a deeper economic frustration after years of weak real income growth. We think it&rsquo;s now more likely that elements of a more fiscally unorthodox approach are incorporated by the opposition, either as Farage enters the Conservative Party or as the existing Tory leadership adopt elements of Reform&rsquo;s platform to squeeze Reform politically. Either way, this suggests that fiscal risks associated with, for example, the agenda of former Prime Ministership of Liz Truss are still with us. Material improvements will likely be necessary if Labour is to push back increasingly prominent populist fiscal voices, and the stakes remain strikingly high.
We also note that as in 2019, shifting interactions between parties have once again compounded somewhat more modest shifts in fundamental opinion. That means the current outcome probably overstates structural political stability. In the near term, that shouldn&rsquo;t detract from what we think is a broadly constructive economic development. But just as voters lent their votes to the Conservatives in 2019, so too some seem to have opted for Labour in 2024, perhaps more out of frustration than proactive support.
Regarding rates, Labour&rsquo;s victory came with almost no uncertainty premium priced&nbsp;into the market. The election does end the blackout for the Monetary Policy Committee. Since June&rsquo;s meeting, the market has been pricing around a 54% to 58% chance of an August cut and will be hoping for clues as policymakers await key data in mid-July.

Existing Citi Research clients can follow&nbsp;<a href="https://www.citivelocity.com/t/eppublic/3BRWg" data-link-source="tiny">this link </a>&nbsp;to access the full report.

The UK elections brought an emphatic victory for Labour, with the scale of the swing amongst the largest in electoral history. That suggests a more forward-looking fiscal approach, one whose implications we consider in a new Citi Research note.

The UK Election: Robust Majority, Sufficient Authority, High Stakes

Government

The U.S. general elections on November 5 will feature competitive races for control of the White House, the House of Representatives and the Senate. A Biden&ndash;Trump rematch looks likely, despite low national support for both candidates. &ldquo;Double-hating&rdquo; Biden&ndash;Trump voters in six swing states will play a pivotal role in determining the outcome. What happens at the top of the ticket will largely determine down-ballot races for the House and Senate. This leaves the closely divided House a toss-up and gives Republicans an early advantage in the Senate cycle.
The following are some of the major takeaways from our Must C report:
<ul>
<li>
President Biden and former President Trump are the frontrunners for their parties&rsquo; nominations. A majority of pledged delegates will be allocated by mid-March, meaning the window is closing fast for primary voters to choose someone else in either party. As soon as late March or early April, the frontrunners could receive a majority of pledged delegates to become their presumptive party nominees. Barring an unexpected development, Biden and Trump are heading for a rematch. The election calendar also coincides with the legal calendar for Trump&rsquo;s four criminal cases. Trials are expected to last at least two to three months and are unlikely to occur concurrently; no trial will finish before Trump becomes the presumptive nominee.
</li>
<li>
Should either candidate withdraw from the race, how a new nominee is chosen and by whom depends on timing. If that happens before the party convention, a nominee will be chosen based on who can receive a majority of primary delegates, with a competition for delegates if no candidate reaches a majority. If a candidate withdraws before ballots are printed, either the Democratic National Committee (DNC) or Republican National Committee (RNC) will choose a replacement based on party rules. If ballots have been printed but it&rsquo;s before Election Day, the DNC or RNC will choose a replacement but the candidates will remain on the ballots, with Biden or Trump electors told to vote for the replacement during the Electoral College count. If it&rsquo;s after Election Day but before the Electoral College count, it will be up to electors to choose, with the decision going to the House if no candidate receives a majority of the Electoral College. Finally, if such an event happens after the Electoral College count but before the inauguration, the Vice President-elect will become President.
</li>
<li>
The election will come down to tens of thousands of voters in six states: Arizona, Georgia, Michigan, Nevada, Pennsylvania and Wisconsin. Today Trump appears to be the favorite, as he&rsquo;s leading in an aggregate of polls nationally and in five of the six swing states. But Election Day is more than eight months away.
</li>
<li>
Biden&rsquo;s unfavorable rating is 58%, while Trump&rsquo;s is 57%, with 16% of voters disliking both candidates. One of the most important questions for 2024 is what these &ldquo;double-hating&rdquo; voters will do: fall in line, vote for a third-party candidate, or stay home.&nbsp;
</li>
<li>
The close presidential race leaves control of the House too close to call; there&rsquo;s a good chance whichever party wins the White House also wins the House. Meanwhile, Republicans hold a geographic advantage in the Senate; there, Democrats&rsquo; best possible outcome is a 50&ndash;50 split Senate, with the Vice President as the tie-breaking majority. A final factor of note is candidate quality: Republicans have lost several winnable House and Senate races in the past by nominating controversial candidates.
</li>
</ul>
&nbsp;
&nbsp;

Our new Must C report, The U.S. Elections &ndash; Buckling Up for Volatility, also features strategy notes from our analysts spanning a range of assets.
Read the full report&nbsp;<a href="https://ir.citi.com/L9iG9l8CdDJd86zLtMcDATrPu7qzoVl3Zd6Ucy5SkmDFaKxLlwbb0ZhE59jTlnvbRj63kdouvQI1RDZLqpMwAHK2QFQIParM-vPmzqb9HRc%3D" target="_blank" rel="noopener" data-link-source="tiny">here</a>.

The U.S. general elections on November 5 will feature competitive races for control of the White House, the House of Representatives and the Senate. A Biden&ndash;Trump rematch looks likely, despite low national support for both candidates. &ldquo;Double-hating&rdquo; Biden&ndash;Trump voters in six swing states will play a pivotal role in determining the outcome. What happens at the top of the ticket will largely determine down-ballot races for the House and Senate. This leaves the closely divided House a toss-up and gives Republicans an early advantage in the Senate cycle.

The U.S. Elections – Buckling Up for Volatility

Research

In a new Citi Research report, a team led by Johanna Chua analyze&nbsp;four major issues&nbsp;where the outcome of U.S. elections will materially influence Asian economies and markets: tariffs, global financial conditions, energy prices, and foreign-policy and security alliances in the region.
The following is a freely accessible summary of a published Citi Research report.
Our Deep Dive assumes there will be no major economic and foreign policy divergences between President Biden and the presumptive Democratic nominee, Vice President Harris. Former President Trump, on the other hand, has made many public pronouncements, and some of his advisers have mapped out a provocative policy road map, known as Project 2025. The outcome of the election is uncertain, but the stakes are high for Asia.
The first issue is tariffs and their impact on trade, investment and growth.&nbsp;A Trump administration is likely to yield sharp asymmetry in tariff risks for China vs. rest of the world, with a 60% tariff against China likely alongside 10% tariffs for many other countries. (Some observers expect a 60% proposal would likely be negotiated and diluted.) We think a negative growth shock to China would likely have the greatest adverse impact on East Asia, led by Taiwan, Hong Kong, Korea, Vietnam and Singapore. While we&rsquo;d expect legal challenges to tariffs, the Asian economies without the protection of free trade agreements that would be most affected by a potential 10% tariff are Vietnam, Taiwan, Thailand and Malaysia.
Substitution benefits from eroding Chinese competitiveness in the U.S. markets for other Asian exporters would likely be limited, and Chinese goods diverted to third markets would pose a challenge. The most likely sourcing alternatives to China would be India and Vietnam.
The second issue is tighter global financial conditions under a second Trump administration, due to the inflationary implications of possible tariffs, migration curbs and extended/expanded tax cuts. Such a scenario would likely prompt tighter global funding conditions, weaken capital flows to Emerging Markets/Asia, and undermine monetary-policy flexibility at a time when real rates vs. &ldquo;neutral&rdquo; rates are high in China, Philippines, Indonesia, Thailand and Korea. More fiscal activism in Indonesia could intensify pressures on risk assets.
The third issue is lower oil and gas prices under a Trump administration.&nbsp;Such lower prices at a time of heightened trade-related growth uncertainties could support more accommodative monetary policy, especially in economies where inflation is most sensitive to oil prices. Singapore, Thailand and Philippines stand out, with a stronger case in the latter two for imminence of easing. We should note that we don&rsquo;t think a second Trump presidency would lead to a wholesale repeal of the Inflation Reduction Act, as it&rsquo;s very hard to repeal a law once passed and the economic benefits of clean-energy investments and jobs have disproportionately gone to Republican-leaning districts.
The fourth issue is foreign policy and security alliances in the region, with the U.S. stance toward China and Taiwan of particular importance.&nbsp;A more transactional or isolationist foreign policy under Trump could lead Asian governments to increase their defense budgets and possibly encourage &ldquo;hedging&rdquo; by moving toward more cooperative stances with China, which would benefit China.

Our new report, Asia Economics: U.S. Elections &ndash; What&rsquo;s at Stake for Asian Economies? is available in full to existing Citi Research clients <a href="https://www.citivelocity.com/t/eppublic/3EhNo" target="_blank" rel="noopener" data-link-source="tiny">here</a>.

In a new Citi Research report, a team led by Johanna Chua analyze&nbsp;four major issues&nbsp;where the outcome of U.S. elections will materially influence Asian economies and markets: tariffs, global financial conditions, energy prices, and foreign-policy and security alliances in the region.

U.S. Elections: What’s at Stake for Asian Economies?

Citi’s Research team leverages expertise across all asset classes and regions to provide our clients with independent analysis of financial markets, economies, industries and companies.

In a new Citi Research note, a team led by Deputy Chief European Economist Christian Schulz previews the February 23rd federal elections, exploring the geopolitical and economic context and highlighting that the parties’ campaign positions do relatively little to address Germany’s challenges.

German Election Preview: Last Chance for the Center?

Our take on the world’s key elections and what they mean for economies and markets.

Elections

Transcript 

Donald Trump was elected to a second U.S. presidential term this week as the world watched the results unfold into the early hours of Wednesday morning. In this special edition of Research @ Citi, Rob Rowe is joined by Scott Chronert, Head of U.S. Equity and ETF Strategy, and Dan Tobon, Head of G10 FX Strategy, to discuss how the financial markets were trading in the runup to the election, and what they’ll likely be focusing on in a second Trump administration.&nbsp;<o:p></o:p><o:p></o:p>This podcast contains thematic content and is not intended to be investment research. Nor does it constitute financial, economic, legal, tax or accounting advice. This podcast is provided for information purposes only and does not constitute an offer or solicitation to purchase or sell any financial instruments. The contents of this podcast are not based on your individual circumstances and should not be relied upon as an assessment of suitability for you of a particular product, security, or transaction. The information in this podcast is based on generally available information and, although obtained from sources believed by Citi to be reliable, its accuracy and completeness are not guaranteed. Past performance is not a guarantee or indication of future results. This podcast may not be copied or distributed, in whole or in part, without the express written consent of Citi. © 2024 Citigroup Global Markets Inc. Member SIPC. All rights reserved. Citi and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world.<o:p></o:p>

Rob Rowe is Head of the Global Strategy and Macro Group (GSMG) as well as the U.S. Regional Director of Research. GSMG unites all of Citi's economists with fixed income, FX, equity and commodities strategists to create a common team providing research on the world's major economies and asset classes. Rob has been with Citi for 30 years serving in various capacities. He originally joined Smith Barney Harris Upham &amp; Company in 1989, working in investment banking, fixed income sales and research.&nbsp; In addition to his managerial responsibilities, he continues to provide portfolio strategy for select clients as part of his previous role overseeing the Global Bond Portfolio Analysis team. He has written numerous articles and publications on fixed income and portfolio strategy.<o:p></o:p>

Rob Rowe, Head of Global Strategy and Macro Research and U.S. Regional Director of Research 

Scott Chronert is a Managing Director at Citi Research serving several roles, including U.S. Equity Strategist, Global Head of ETF Strategy &amp; Analysis, and U.S. Small/Mid Cap Strategy. Scott assumed the U.S. Equity Strategy role at Citi in October 2021. He brings a fundamental approach to assess the U.S. equity landscape. Regarding ETFs, Scott and his team have been at the forefront of sell-side, institutional-grade analysis of the ETF ecosystem since 2012. His product covers all facets of ETFs, including broader industry trends, flow analysis, and stock and market impacts, complemented with positioning views covering most asset classes and geographies. His work on U.S. Small/Mid Cap provides a blend of top-down and stock-specific insight. Scott also contributes to Citi’s global equity strategy product. Prior to joining Citi Research in 2010, Scott spent more than 25 years in institutional equity sales and management roles (mostly at Citi). Scott is a graduate of Dartmouth College (AB degree, 1978) and UCLA Graduate School of Management (MBA degree, 1980).<o:p></o:p>

Scott Chronert, Head of U.S. Equity and ETF Strategy, Citi Research

Daniel Tobon is Head of G10 FX Strategy at Citi Research. Prior to rejoining Citi, Daniel was a macro strategist at Millennium. Daniel previously worked at Citi from 2012-2021 as an FX Strategist in Citi Markets in both New York and London. He began his career at BlackRock. Daniel holds an MBA from the NYU Stern School of Business and a Bachelor’s degree in Political Science from the Villanova University.<o:p></o:p>&nbsp;<o:p></o:p>

Daniel Tobon, Head of G10 FX Strategy, Citi Research

Donald Trump was elected to a second U.S. presidential term this week as the world watched the results unfold into the early hours of Wednesday morning.&nbsp;

/rcs/citigpa/storage/public/Research-Citi_E14 _transcript.pdf

E14: Trump 2.0 and the Markets

Steel equities rallied sharply after Trump’s victory as investors anticipate potentially higher tariffs. But here’s a lesson we learned from Trump 1.0 to keep in mind as Trump 2.0 approaches: Buy the headlines on tariffs, but sell the implementation unless you’re bullish on demand. That’s the key conclusion of a new Citi Research report from metals and mining analyst Alexander Hacking that looks at what happened to steel prices during the first Trump presidency with an eye on potential policies in the second Trump presidency.<o:p></o:p>The U.S. steel industry is currently supported by a two-pronged tariff system. Antidumping and Countervailing Duties (AD/CVD) began to be assessed under President Obama and continued under Presidents Trump and Biden. Section 232 tariffs can be imposed for national-security reasons; the tariff is a blanket 25% on all types of steel.<o:p></o:p>Trump implemented Section 232 of the U.S. Trade Expansion Act in March 2018, more than a year after he became president. Countries including Japan, South Korea and Brazil, as well as the EU, negotiated a quota-tariff where tariffs were zero up to a quota; Canada and Mexico had no quota but were expected to avoid surges.<o:p></o:p>U.S. steel imports peaked at 40 million metric tons in 2014 as Chinese steel exports were surging. A series of AD/CVD cases under Obama reduced imports to 30 million tons, as most Chinese flat-rolled products (a type of processed steel that’s rolled into flat, rectangular sheets or strips) came with tariffs above 250%. Trump’s Section 232 implementation reduced the level further to 25 million tons. Imports rose again in 2022 as U.S. prices surged, offering a huge premium over the rest of the world.<o:p></o:p>Steel prices doubled from $500 a short ton in November 2016, when Trump was elected, to $1,000 a short ton in August 2018 as apparent demand improved. But in hindsight, this runup included a relevant amount of restocking. That’s no surprise, as buyers are likely to buy more and not less when they read headlines about significant new import tariffs.<o:p></o:p>Steel demand rolled over starting in late 2018, exacerbated by stocking, and steel prices fell back to the neighborhood of $500 a ton by the end of 2019.US HRC Price - Trump 1.0<img src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/6734e1f9170942588d2c25e4.png" alt="US HRC Price graph "><div><div><div><div><div>© 2024 Citigroup Inc. No redistribution without Citigroup’s written permission.&nbsp;Source: Citi ResearchIt’s hard to see evidence that steel demand improved under Trump 1.0, and ultimately, it’s steel demand that’s been the bigger driver of prices, not tariffs. U.S. steel prices have consistently traded down to the cost of production during periods of weak demand, regardless of tariffs, while tariffs have exacerbated the price upside during periods of strong demand.<o:p></o:p>So what can we expect from Trump 2.0?<o:p></o:p>We note that Trump hasn’t offered specific proposals about steel tariffs, but could complement 10% tariffs on all products. If that applied to steel, it would boost the cost of some 80% of U.S. imports that currently arrive tariff-free from trade allies. This would support higher steel prices through the cycle, but we doubt it would change the fundamental demand dynamic described above.<o:p></o:p>The key question for Trump 2.0 is whether steel demand will improve. It’s hard to see any Trump 2.0 policy that will help steel demand in the short term, but lower Fed interest rates will likely support more construction activity and the Biden infrastructure bill may boost steel demand under Trump despite being disappointing in that respect so far.<o:p></o:p></div><o:p></o:p></div></div></div></div>

Our new report, North America Steel: Lessons From Trump 1.0; Expectations for Trump 2.0, is available in full to existing Citi Research clients &nbsp;<a href="https://www.citivelocity.com/t/eppublic/3QLj9">here</a>.<o:p></o:p>

Steel equities rallied sharply after Trump’s victory as investors anticipate potentially higher tariffs. But here’s a lesson we learned from Trump 1.0 to keep in mind as Trump 2.0 approaches: Buy the headlines on tariffs, but sell the implementation unless you’re bullish on demand. That’s the key conclusion of a new Citi Research report from metals and mining analyst Alexander Hacking that looks at what happened to steel prices during the first Trump presidency with an eye on potential policies in the second Trump presidency.&nbsp;&nbsp;

North America Steel: Lessons from Trump 1.0, Expectations for Trump 2.0

<ul><li>Germany’s next chancellor will have to engage with the U.S. on a number of key issues.</li><li>German GDP has stagnated since 2018, with multiple factors contributing to this economic underperformance.</li><li>Fiscal-stimulus efforts are made more difficult by constraints at the EU and national levels. &nbsp;</li></ul>

In a new Citi Research note, a team led by Deputy Chief European Economist Christian Schulz previews the February 23rd federal election, exploring the geopolitical and economic context and highlighting that the parties’ campaign positions do relatively little to address Germany’s challenges. The Trump administration’s approach to trade and tariff policy could risk major trade tensions with both Germany and the European Union (EU). Germany is particularly dependent on the European and global rules-based order, and that order’s erosion is one factor in Germany’s economic decline over the last seven years and a looming challenge for the country’s next government.&nbsp;<h4>Key issues</h4>The next German chancellor will have to respond to the U.S. on any number of key issues. Trump has repeatedly threatened to impose tariffs on the EU, with his goals ranging from helping balance bilateral trade and bolstering U.S. fiscal revenue to using trade issues as bargaining chips for a range of unrelated issues. The EU Commission handles trade issues for the customs union, including disputes, but member states must give guidance and cover.&nbsp; Trump’s drive to reduce U.S. energy costs could also lower energy prices in Europe and help diversify energy imports. But more fossil-fuel consumption would endanger emissions reduction targets and could provoke higher emissions prices of tariffs. How will Germany’s next government approach national, European and international energy policy? Under Olaf Scholz, Germany became a key contributor of weapons and money to Ukraine and raised its defense spending to 2% of GDP by introducing a €100 billion military fund. But this support was often perceived as overly driven by concerns about escalation. Germany’s next government will have to try and help defend European interests while building up Europe’s defense capacity, to alleviate the burden on the U.S. but also to reduce dependence on it. A key decision: whether to build up Europe’s defense industry (which would boost Europe’s economy) or simply purchase U.S. weapons systems (which would boost the U.S. economy). Tax cuts for U.S. companies, tariffs and fiscal expansion under the Trump administration pose complex challenges for European fiscal policy. Taxation and fiscal policy are national remits in the EU and the euro area, but the next German chancellor may have to contribute to Europe’s collective stance on the Organization for Economic Cooperation and Development (OECD) minimum-taxation project and on the implications of higher global interest rates for the level and distribution of fiscal space in the euro area. Trump is looking to scrap regulations of financial services and artificial intelligence, while threatening to take issue with the EU’s Digital Services Act and its implications for U.S. digital platforms. Conversely, the EU may follow China in imposing restrictions on U.S. tech firms in order to gain leverage in trade negotiations. As a result, the EU risks a growing innovation gap as well as new U.S. tariffs and trade barriers.<h4>Economic woes</h4>German GDP has stagnated since 2018 and fallen behind all other G7 economies since the pandemic, and we see a number of reasons for this stagnation.&nbsp; Germany’s economy has been hampered by trade underperformance, generally suffering from the erosion of international trade norms, especially the 2018 trade wars between the U.S. and China. Germany has also lost labor-cost competitiveness relative to the rest of the euro area since 2010, been hurt by disrupted supply chains during both the pandemic and the Russia–Ukraine conflict, been dragged down by slowing growth in Chinese demand and become vulnerable to Chinese competition. This trade underperformance has also led to weak investment, as have red tape, the second-highest corporate tax rate in the OECD (behind only Portugal), more favorable investment incentives elsewhere, high costs and interest rates. Tight fiscal policy has played a role; public investment has gone backwards with fiscal rules constraining the government’s ability to respond to long-term structural changes such as mass immigration. A 2023 constitutional-court verdict further tightened Germany’s constitutional debt brake, leaving the government little room to address the long-term consequences of the pandemic and the energy crisis. Despite the last 10 years being marked by weak growth and strong immigration, Germany’s unemployment rate remains low at 3.4%. This tight labor market has led to difficulties finding adequate staffing, which has held back investment and given labor unions bargaining power to negotiate steep wage increases. Other labor problems include a relatively low number of hours worked and extremely high and persistent sick-leave rates.<h4>The constitutional debt brake</h4>Many governments would try to stimulate their economies ahead of an election, and Germany’s public debt ratio, deficits and borrowing costs are all low. But Germany’s fiscal restraint is driven by its constitutional debt brake, which caps structural federal borrowing at 0.35% of GDP and structural state borrowing at 0% of GDP. This rule can be suspended in emergency situations, such as the pandemic and the energy crisis. But calls for emergencies are complicated by Germany’s hawkish constitutional court; a November 2023 constitutional-court ruling on borrowing allowances eliminated most of the fiscal reserves available to Chancellor Scholz’s coalition, and thus also took away that coalition’s policy leeway.<figure class="image image_resized image-style-align-center" style="border-radius:10px;display:flex;overflow:hidden;width:fit-content;"><img style="aspect-ratio:1430/950;" src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/67b8c940e303fb597045996e.jpg" alt="German flags fly above an official building with blue sky and sparse clouds in the background" width="1430" height="950"></figure> Germany’s new government will start in 2025 with a provisional budget, since the Bundestag didn’t pass a budget in 2024. This means the government can keep spending to comply with legal obligations and to fund programs that already received funding in 2024; it can also borrow up to 25% of the previous year’s budget. But it can’t start new programs. Provisional budgeting may start out relatively neutral fiscally, but as time passes and programs expire, policy could become more restrictive. This makes passing a 2025 budget one of the earliest priorities for the new government.&nbsp; That federal budget will be subject to two sets of constraints. The first: EU rules that limit public borrowing to 3% of GDP and aim to put government spending on a path to ensuring the structural general government deficit doesn’t exceed 1.5% of GDP and the public debt ratio falls by 1 pp per year. The second constraint is the constitutional debt brake, described above. Based on the federal economy ministry’s potential growth estimates and our growth and GDP deflator estimates, federal borrowing excluding the military fund could rise to €41.2 billion in 2025 and €38.7 billion in 2026. But from 2028 on, fiscal policy would have to tighten substantially as the €100 billion military fund would be exhausted and the government would have to start repaying €300 billion of pandemic-era debt over 30 years. Around €30 billion in spending cuts would be necessary. That means the EU and national constraints leave little meaningful fiscal space for Germany to stimulate its economy; in fact, both constraints require fiscal tightening of 0.5% to 0.75% of GDP toward the end of the next parliamentary term. Reforms of the debt brake seek to avoid this backloaded tightening, but wouldn’t create any near-term fiscal space. And we doubt a wholesale reform is swiftly achievable anyway, as changes to Germany’s constitution requires a two-thirds majority in both houses of parliament, which most polls show would require a coalition of at least four parties.<h4>Potential electoral scenarios</h4>The electoral outcomes we see as most likely depend on how three political parties fare: the center-right Christian Democratic Union (CDU), the center-left Social Democratic Party (SPD), and the Greens. We don’t see the far-right Alternative for Germany (AfD) playing a substantial role in our high-probability scenarios. The CDU’s focus is on improving German competitiveness by bringing down labor and energy costs, with a pledge to maintain the constitutional debt brake. The SPD looks to stimulate demand in a mostly fiscally neutral but redistributive way, with tax cuts for 95% of households at the expense of the wealthiest 5%, and it’s open to reforming the debt brake. The Greens’ program has many similarities with the SPD’s. We see the two most likely electoral outcomes as a CDU-SPD Pensioner Coalition and a CDU-Greens Geopolitical Hawks alignment.&nbsp; Given the strength of the CDU and SPD, the Pensioner Coalition remains the fallback solution in terms of political turmoil and economic crisis for Germany. While neither party commands huge majorities in today’s Bundestag, they still run almost of all Germany’s states and would be more likely to be able to assemble the majorities necessary for big changes. But the two parties’ manifestos are almost diametrically opposed, and either party would need additional fiscal space to implement some of its promises. The Greens are the most hawkish party in Germany in terms of Russia and China, and have been more aggressive in pushing for a coalition with the CDU than the SPD has, which suggests the Greens would be more willing to compromise on their lesser priorities than the SPD would be. In considering the possibilities for the Geopolitical Hawks, we note that while the CDU and Greens are already running successful state coalitions in key industrial areas, they’ve never worked together at the national level. Despite economic and foreign-policy overlaps, we see this coalition as a less likely outcome than the Pensioner Coalition. Our new report, Election Preview: Last Chance for the Centre?, also includes a deeper look at the major German political parties, further exploration of possible electoral outcomes, and strategic advice for investors. It’s available in full to existing Citi Research clients <a href="https://www.citivelocity.com/t/eppublic/3Z5sN" target="_blank">here</a>.

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