Fail, fail… and extend

Macro 5 minutes to read

Christopher Dembik

Head of Macroeconomic Research

Summary: The Brexit debacle is winding its way towards a conclusion on paper, but there are precious few certainties surrounding the topic as Parliament remains bitterly divided and the UK political class as a whole do not appear to know what they want.

Brexit is back on the top of the agenda as Parliament is expected to vote on Prime Minister Theresa May’s deal tomorrow. What is rather positive is that at the end of this week, probably as soon as Thursday, we will know a bit more about the Brexit process in the coming months. Investors are not waiting for any positive outcome today, however; most ministers think the deal will be defeated by at least 200 votes. According to press report's one even stated that “we are a long way up sh*t creek – never mind a paddle, we don’t have a boat”.

To say negotiations between May, her own party and the opposition are tense would be a severe understatement.

A defeat would open the door to a new vote on whether to leave the European Union with no deal on Wednesday, which will likely be rejected as well. Then, MPs will vote on whether to seek an extension of Article 50, which will probably pass on Thursday (for more on this, read Saxo CIO Steen Jakobsen's latest).

In other words, we should avoid a no-deal exit in the short-term, but negotiations are far from over.

May will need to go back to Brussels to ask the EU-27 for an extension, which is not a done deal. I discussed this very issue last week with a group of EU diplomats at a Brexit event in Malta; all of them confirmed that EU leaders are open to an extension period but not at any cost. The British PM needs to come to Brussels with a clear plan: either a new referendum (unlikely at this stage), time to call early elections (unlikely as well), or more time to align her own party on the issue and what has already been negotiated with the EU.

An extension of Article 50 is technically easy but politically sensitive. As the EU diplomats told me, if the extension goes beyond the EU elections, it means that that EU elections need to be organised in the UK and that there will be British MPs in the newly elected European parliament –a strange situation for a country that voted Leave, however tangled the aftermath has been.

If it goes beyond 2019, let’s say to 2020, it means that the UK should be part of the negotiations for a new EU budget. Obviously, this would make no sense at all. It seems very clear to me that Brexit will be messy even if an extension is granted, as the UK political class do not have any clear idea of what they want.

I think the following quote from Franz Kafka perfectly applies to the current UK situation: “one idiot is one idiot. Two idiots are two idiots. Ten thousand idiots are a political party”.

Looking ahead, I expect:

• More pain for UK assets, especially listed companies that are heavily dependent on the UK market in terms of revenue, as UK consumption is slowing and UK household stress is increasing sharply.

• Higher GBP volatility (as a gentle reminder, based on PPP, the GBP is still undervalued by roughly 10% versus USD while it sits at an appropriate level versus EUR).

• A lack of new credit to push down UK economic activity more than forecasted, as political uncertainty will remain for longer.

• Worse data to come.

Quarterly Outlook Q3 2023

AI: The good, the bad, and the bubble

AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.

Steen Jakobsen,
Chief Investment Officer
Read article
Equities: The AI fever pushes market to new extremes
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.

Peter Garnry,
Head of Equity Strategy
Read article
China faces challenges from generative AI amidst the fragmentation game
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.

Redmond Wong,
Market Strategist
Read article
Japan’s riposte to aging and productivity headwinds: robots with generative AI
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.

Charu Chanana,
Market Strategist
Read article
Is AI the new crypto?
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst

Read article
Artificial Intelligence: a promising gamechanger for the portfolio?
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
Read article
FX: The USD smile and the JPY dam break
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.

John J. Hardy,
Head of FX Strategy
Read article
Commodities: Bottoming out?
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.

Ole S. Hansen,
Head of Commodity Strategy
Read article
Fixed income: To hike or not to hike, that is the question
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.

Althea Spinozzi,
Senior Fixed Income Strategist
Read article

You can access both of our platforms from a single Saxo account.

Preview platform Open Account

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Fail, fail… and extend

Christopher Dembik

Share

Latest Market Insights

Quarterly Outlook Q3 2023

AI: The good, the bad, and the bubble

Equities: The AI fever pushes market to new extremes

China faces challenges from generative AI amidst the fragmentation game

Japan’s riposte to aging and productivity headwinds: robots with generative AI

Is AI the new crypto?

Artificial Intelligence: a promising gamechanger for the portfolio?

FX: The USD smile and the JPY dam break

Commodities: Bottoming out?

Fixed income: To hike or not to hike, that is the question

Your browser cannot display this website correctly.