The Weekly - Happy Brexit Anniversary

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25/06/2018
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Boris Johnson recently suggested that Donald Trump would handle Brexit talks better than Theresa May. This has been widely ridiculed in the press and by the Conservative party at large, partly because many find Donald Trump to be of a reprehensible disposition, after all, this is the man who separates children from their parents at the US/Mexican border and keeps them locked up in cages.  Due to mounting pressure, including from his wife, Melenia Trump, he has since rescinded this particularly controversial immigration policy, and quite rightly too. 

However, strangely on this occasion we believe Boris Johnson is correct; it does need someone like Donald Trump to shake things up in our Brexit negotiations. We all went to the polls two years ago yet if you speak to anyone about Brexit they are none the wiser on what a post Brexit Britain will look like when we leave the EU at 11pm on 29th March 2019.  I am not a fan of Love Island, but as widely reported in the press, everyone was very quick to mock and ridicule a reality TV show contestant on this program and her particular understanding of Brexit, but if everyone is being honest, their understanding of what Brexit will look like is no better. This needs to change, and fast.

Donald Trump might not be palatable to many people, but when you look past his ‘child catcher’ persona there is a man with a plan.  He often seems like he shoots (or tweets) from the hip, but since his time in office he has managed to railroad through many of his policies.  Even his most ardent critics have conceded that they have underestimated his tactical nous. We believe this trade war has been meticulously thought out, and those that think Donald Trump doesn’t have a strategy are sadly mistaken. Nobody saw that his Tax Cuts and Jobs Act, introduced on 2nd November 2017, was a precursor to a trade war.  He has provided the stimulus required to companies throughout America to counter any retaliatory measures against corporate America by countries trying to even the score in a trade war.

For example, one such ‘victim’ of this trade war is Harley Davidson, whereby the EU has retaliated with increased tariffs on their motorcycles. They have since announced some motorcycles are to be manufactured outside the US, however this is unnecessary.  In 2016 Harley Davidson’s profit before tax was $1.023 Billion and their profit after tax was $692 million.  They paid $331 million dollars in tax, which is around 33%. If corporation tax was 21%, which it is now, then they would have only paid $214 million, a saving of $117 million, no small beer by any means. Admittedly they might sell fewer motorcycles in Europe, but since it’s not their primary market, and given the tax savings Donald has introduced, Harley Davidson should not be overly concerned. Given the US trade deficit, we believe that Donald Trump does hold all the cards, thus consequently the EU shouldn’t be trying to play with him, especially when the game in question could be Top Trumps!

Meanwhile Theresa May’s government appears to be fumbling around in the dark; she has backbenchers threatening to bring down her government if they don’t get a meaningful vote on Brexit before we leave the EU. The trouble is time is running out, the House of Commons recess date for the summer runs from the 20th July to the 5th September –it’s alright for some!  Given that there are only 277 days left to reach a deal and, according to the parliament’s website, the House of Common has a total of 119 days of recess between now and when we leave – 43% of the total days left, we are not overly optimistic of any meaningful deal being concluded before then, let alone a vote on one.  

Akin to some of the teams at the World Cup finals, the EU has been effectively running down the clock.  The only problem is that this is not the dominant display against Panama we saw on Sunday, we are losing.  Instead of uniting as a team and trying to overcome the opposition we are squabbling amongst ourselves on what Brexit should look like, and before we know it, we will hear the final whistle.  The so-called transition deal will end up being 21 months of injury time with another clock ticking and further uncertainty, most likely.

We are not the only ones who need reassuring about Brexit; last Friday, Airbus has warned that a no-deal Brexit could see them leaving the UK, putting thousands of jobs at risk.  We understand that not everyone wants Brexit to go ahead, but whether you voted for or against, there must be a time where everyone unites to get the best deal possible, and that time is now.  We may well have the weaker hand when negotiating with the EU, but we need to outline several different strategies, for all possible eventualities, and we need to let the EU know.  Should both sides be unable to find common ground and a hard Brexit ensues, then we need to let the EU know that there will be consequences.  One such example is corporation tax which is already set to fall from 21% to 17% under the Conservatives as outlined in their manifesto, but this could be slashed even further.  This would not only dissuade companies from setting up shop in the EU, but could even entice other businesses to these shores.  After all, corporation tax only accounts for roughly 8% of tax revenues in the UK, so by dropping corporation tax to a basic 10% tax rate is one such strategy that could be implicated.  These are the kind of ultimatums that need to be made to the EU, instead of us being on the receiving end of countless ultimatums from them.  As we have learnt before when negotiating with the continent, appeasement does not work.

However, instead of organising our withdrawal from the EU the government is promising an ‘NHS dividend’ for our overstretched health service.  Apart from the dogmatic and misleading wording of this phrase; a dividend implies profits have been made and distributed, when in reality they are going to increase taxes to cover this £20 billion ‘windfall’. As we don’t know what Brexit fully entails, it is misleading to say that the NHS is benefiting from Brexit. We are not saying that the NHS doesn’t need the money or isn’t a worthy recipient, but this money is ammunition we may need to deploy elsewhere to safeguard the country and economy in the wake of unfavourable Brexit negotiations.  What this has also done is allow the Prime Minister to be bullied by other members of her cabinet, such as the Defence Secretary, Gavin Williamson, who is now demanding an extra £20 billion for defence, or else he is going to dethrone the Prime minister.  This is the type of infighting that isn’t required right now.  In fact, in light of our looming withdrawal from the EU and how little time we have left; ignominy is the only way to describe the government’s handling of Brexit thus far.  In the interests of impartiality, we don’t think Jeremy Corbyn or Labour have offered any clarity on what they believe Brexit should look like either.  Donald Trump might not be the most palatable candidate, but one suspects he might have got more done.  Time to get a move on and fast as Sterling and the UK equity market are starting to get jittery.

Volatile week for Oil as OPEC meeting concludes

OPEC ministers met in Vienna last week with the Cartel agreeing to lift its crude output by 600,000 barrels a day, 400,000 barrels lower than forecasts. The Cartel had agreed to cut its production by 1.8m barrels a day back in 2016 following the slump in global oil prices and the move was largely successful with crude hitting a 3 and half year high earlier this year. With the increase much lower than expected both Brent and WTI rallied following the meetings conclusion with the former ultimately closing the week +2.9% higher at $75.55 a barrel. Both had traded lower in the build-up to the meeting.

European equity markets came under heavy selling pressure as trade tensions between the US and the Bloc rose. The export heavy German DAX30 was the hardest hit, falling by -3.3% with the French CAC40 -2.1% lower over the week. US and Japanese markets also endured a disappointing week with the S&P500 declining by -0.9% and the Nikkei 225 by -1.5%. Contrary to its global peers, the FTSE100 ended the week in positive territory having benefitted from the rising oil price. It rose by +0.6% to 7,682 although the mid-cap focussed FTSE250 was flat for the week.

Sovereign bond markets in the UK and the US had a largely uneventful week with 10-year yields for both countries broadly unchanged. The UK Gilt remained at 1.37% with the equivalent US Treasury 3 basis points lower at 2.89%.

The Bank of England voted to keep its rate unchanged at last week’s MPC meeting, however, the vote was closer than expected which increases the chances of another rate rise over the next few months. That helped lift Sterling post-meeting although not enough to prevent the domestic currency from facing another week in the red. Over the course of the week, it declined by -0.1% versus the Dollar to $1.32 and by -0.3% against the Euro to €1.14.

Elsewhere in the commodities markets, Gold came under further pressure as the US Dollar continued to track higher. The precious metal declined by -0.9% or $11.50 to close the week at $1,270 an ounce.

The Week ahead

This week brings the final revisions of Q1 GDP from both the UK and the US and no changes to the previous calculations are expected. A paltry +0.1% quarterly pace for the UK is likely to be confirmed with the American economy set to have grown by +2.2% over the same period. Later in the week, the Bank of England releases its latest consumer borrowing statistics covering areas such as credit card borrowing and mortgage approvals. Other headline American related figures include the likes of durable goods orders and consumer sentiment as calculated by the University of Michigan. In the Eurozone, all focus is likely to be on Friday’s inflation number which is expected to hit the ECB’s headline target of 2.0%. However, core-inflation is expected to be just half of that which will no doubt be a major headache for the central bank as it looks to wind down its quantitative easing programme. It’s also a busy week for Japanese related data with inflation, unemployment and industrial production all due before the close of play on Friday. Chinese activity is limited once again.