Another week, another vote
Chief Investment Officer
Summary: PM May's appearance before Parliament should mean the Brexit saga is set to enter its final phase. Given May's remote chances of securing her widely panned deal, however, the road to a conclusion is as unclear as it has ever been.
BBC political editor Laura Kuenssberg calls the chances of Parliament approving May's deal 'very remote', with the subsequent voting procedure then proceeding something like this:
Was the UK to leave the European Union, for instance, with or without a customs union? There is also the Northern Ireland issue with its border to Ireland (and thus the EU), and an inside both the government and the opposition on what they wanted from the EU.
Parliament continues to excuse itself by claiming that it is “respecting the vote of the people”. The problem here is that voters elect a Parliament to do the hard part for them – by definition, it falls on Parliament to both represent voters and enact a plan/strategy!
There is a political crisis in the UK – not only in the Tory Party, but across all parties. This weekend, polls in Northern Ireland showed the DUP failing to represent its voters; Northern Ireland voters want a soft Brexit:
• Almost 60% say they want a special arrangement for Northern Ireland for no checks on the border, even if that meant some checks on goods traveling between Great Britain and its province of Northern Ireland.
We see the most likely sequence of event being:
March 12: Fail
March 13: Fail
March 14: Pass…
This means May will have to ask the EU for an extension of Article 50 of the Treaty. This, however, is not an easy job; this link is very useful in terms of explaining the complexities.
An extension has to be accepted uninamously by all EU members; many countries, led by France, would like to know what the UK will use the extra time for. The hope is a second referendum, but buying more time also clashes with the European Parlimentary Elections in May. As The Institute of Government points out, the length of any Article 50 extension would ultimately be determined through negotiations between the UK and the EU. It would depend on how much was left to do – whether it was just ratification or renegotiation – and the EU’s willingness to overcome some of the major obstacles.
In particular, it would have to factor in the European parliamentary timetable:
May 2019: European Parliament elections
July 2019: new MEPs take their seats
Autumn 2019: the new European Commission faces appointment hearings in the European Parliament.
As such, four time slots have been suggested: April 18, 2019; May 23 2019; July 2, 2019, or beyond.
All options, again, contain many complexities.
Risk assessment: our view
Hard Brexit: 25% chance
Extension: 70% chance
PM May's deal: 5% chance
Hard Brexit comes with a 5-8% drop in GBP and a 5% drop in equities (based on major event risks since 9/11. An extension, however, is not as positive as it may sound. Here's why:
A delay would avoid a hard Brexit but as we have constantly said on GBP and the UK economy, our biggest concern for 2019 is not Brexit (we also gave high probability to an extension) but the economic deterioration of credit. We see the Bank of England as behind on rates, and the credit impulse for the UK remains one of the weakest in Europe and the G20.
We are concerned – very concerned – about the UK. Macro data will continue to underperform, in particular the credit facilitation which indicates a summer of contraction (credit impulse leads he growth cycle by six to nine months).
• Forex: underweight; we see potential for 1.2000 in GBPUSD.
• Fixed Income: underweight, but the BoE will start cutting rates by Q4 ( the probability by consensus is less than 18% but we see it at 70%).
• Equities: neutral. – Companies are flexible and able to weather storms, but investment will continue to fall.
Let’s hope this will follow the line taken by the great former London School of Economics student Mick Jagger:
"You can't always get what you want. But if you try sometimes, you find: you get what you need."
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Central banks' attempts to kill inflation is a paradigm shift, which could end in a deep recession.
Tangible assets and profitable growth are the winnersWith US equities officially in a bear market, the big question is where and when is the bottom in the current drawdown?
Understanding the lack of investment appetite among oil majorsThe everything rally seen in recent quarters has become more uneven, as its strength is driven by commodities in short supply.
The pressure is on as the wind leaves the sailsWith cryptocurrencies in sharp decline, are we entering a crypto winter or is the bear market a healthy clean-up of the crypto space?
Why the Fed can never catch up and what turns the US dollar lower?Many other central banks are set to eventually outpace the Fed in hiking rates, taking their real interest rates to levels higher than the Fed will achieve.
Bank of Japan: Swimming against the tideThe Japanese economy has gone from the age of deflation to rapidly rising prices in no time, leaving the Bank of Japan in a pickle.
Green transformation detour and bear market hibernationWith the impending risk of global econonomic derailment, we share the five things investors need to consider in this new half year.
Crisis redux for the eurozone?Whether there's going to be a recession in Europe or not, the path towards a stable economy will be agonizing.
Technical Outlook: Gold, Oil and a remarkable multi-decade perspective on EquitiesThe Nasdaq bubble pattern, USDJPY resistance, crude oil uptrend losing steam and the technical outlook for USD.
China: the train of new development paradigm left the station two years agoChina is transiting to a new development paradigm, as they are hit by deteriorating terms of trade, a slower global economy and an uncertain future while continuing attempts to contain the pandemic.