The UK parliament has taken control of attempting to avoid a No Deal Brexit, which points to a further delay and soft Brexit scenario. Late last night a one-vote majority in the House of Commons approved a move to require that May request an extension with the EU and that it could revise the length of the extension if not deemed sufficient. May is ready to cross her own red lines on a customs union, which would seem to guarantee what is increasingly already a fairly open civil war in the Tory party. Sterling appears cautiously optimistic that the process will proceed smoothly from here, though the lack of more upside on this latest news actually suggests some degree of underlying weakness. Bloomberg reports
that the US may give China until 2025 – conveniently the year that a second term for Trump would end – to make good on its commitments to purchases of US goods and allow 100% foreign ownership of Chinese companies. This is most likely an effort by the US side to extract something that looks good on paper to maximize political gain ahead of the November 2020 election and likewise to avoid any damage to economic and market confidence ahead of that date.
There are apparently outstanding issues on enforcement of the deal and the hot button issue of technology transfer, but where this process is headed is neatly encapsulates in this line from the Bloomberg article: “The White House is particularly focused on purchases commitments through the second quarter of 2020, in an effort to narrow the trade balance ahead of Trump’s re-election bid.”
So – now it looks like we will be getting the softest of Brexits and the maximum market-friendly outcome of the for the US-China trade deal via a near six-year delay. This means that global markets will have to get back down to the humdrum business of assessing the global economic outlook and how far it has taken its celebration of accommodative policymakers. To my eyes, the exit of these two bogeymen for markets was long ago priced in.
And now, given a steep backup in US interest rates all along the yield curve over the last week, we are at a near term pivot point as well: the point at which circular logic becomes unbearable if my diagnosis of the situation is correct. In other words, can market sentiment and global yields continue to back up when it was precisely the reintroduction off the policy punch bowl earlier this year that goosed confidence in the first place? Either markets pivot back lower very soon, or we are building all of our confidence for a further melt-up on a single round of a PMI bump in China providing stimulus for the world economy and boosting it enough to overcome rising yields and energy prices. Chart: GBPUSD
GBPUSD has rebounded, but shouldn’t this latest round of news have boosted the currency even more? Supposedly, we’re just waiting for the EU to grant the requested delay (don’t see any reason for the EU to play chicken now that May has folded on her red lines) and for the actual agreement to take shape, but we’re sceptical that sterling can put much more together here even if a clear path to a soft Brexit emerges. Stay tuned.