The Weekly - Round Two


It is with some relief that we would now appear to have moved to the second stage of the Brexit talks. The agreement, or whatever it was, on the Irish Border, as well as the ballpark ranges of the divorce bill and the reciprocal rights of ex-pats was largely administrative and isn’t the part that most business leaders are interested in. Now we can start firming up on trade arrangements and that has to be good news as it brings the day of clarity closer. However, this side of the year-end is unlikely to see anything substantive. Also, the opening gambit from David Davis and his desired ‘Canada plus plus plus’ sounds rather like Trump’s pre-election ‘Brexit plus plus plus’ when he was referring to America First. Michel Barnier has already adopted a combative stance ruling out any cherry-picking of other deals but he has to demonstrate a tough stance outside of the negotiating room to maintain the confidence of the other 27 members.

Theresa May clearly has a renewed spring in her step and had no hesitation in dismissing her party vice-chairman, Stephen Hammond, when he rebelled in last week’s Brexit bill vote. It is mildly amusing that the Tory party is now asking her to stay on until the completion of the negotiations. This assumes she is going to step down if she delivers a good Brexit outcome which we wouldn’t take as read if she makes a habit of delivering from here. We view the divorce bill as a bargain as it also covers any transitional period when we would have been contributing a net £12bn a year anyway. The lack of criticism from all sides of the House of Commons is noticeable and we think the consensus view is similar in that we have done well but we don’t want to let the EU chiefs think so by celebrating ahead of round two.

The latest combative comments coming from Barnier suggest that the EU may be looking to deliberately discriminate against the UK when they have agreed similar tariff-free trade arrangements with other non-EU nations. If this is the case, then negotiations are going to get bogged down in international law. If the view is that we can’t emulate Canada or Japan because we are an EU divorcee and that we need to be punished for bad behaviour, then the likes of Johnson and Gove will be difficult to silence. This would then become very fractious. Once again, when the likes of Barnier, Tusk and Juncker (un-elected EU officials) start pushing around democratically elected leaders, emotions run high and the Brexiteer/Remainer divisions within the Tory party become all too evident once more.

It helps that there are other trading arrangements in place from which we can base an initial framework and as some of these are free from tariffs but without any freedom of movement for labour, effectively providing single market access, the UK is in a good starting place. This feature does form part of the Brexit argument in that why should we have to pay £12bn a year for access to a market that others largely achieve without the same membership subscription and immigration conditionality? Of course, the EU will be wary of agreeing something with us that then opens a can of worms as others then want the same. However, it will not stand up as a fair deal to the UK if that is the reasoning behind us not being able to adopt, say, the Canadian deal as a bare minimum.

With a significantly weakened Angela Merkel, the Eurozone certainly needs Emmanuel Macron’s pro-EU stance. However, his popularity at home is plummeting as he adopts an aloof, almost Trump-like arrogance having been elected. The youth vote is deserting him rapidly as he attempts to push through his labour reforms. The solution to the Eurozone’s challenges over the last few years has been to forge ahead with ever closer union, ultimately involving control over fiscal and monetary policy and the formation of a federal United States of Europe. If the UK wasn’t leaving the EU of today, then when this future direction of travel becomes more definite, it would probably have become inevitable that we would want no part of it. Better to exit now and get on with building our global prosperity than realise we can take no more of this ill-fated experiment in a few years’ time.

Perhaps with closer fiscal union, the Eurozone will work. Current economic growth numbers are encouraging, unemployment is falling and the equity markets have been strong. However, the likes of Greece face a generation of economic hardship and Brussels imposed austerity. With the benefit of hindsight, there are many Remainers who so voted because they saw self-inflicted economic and stock market turmoil, which hasn’t happened. There is weakness and hesitation in some areas of the UK economy, but nothing catastrophic. We have 15 months left to agree a trading arrangement including a transitional period. Sterling is yet to rally but for 2017 to date, the FTSE-250 has now outperformed the FTSE-100 by almost 5%, which started in April, when the election was announced. A reversal of the relationship following the Brexit vote as sterling devalued. Whilst the post-election slim majority was billed as a disaster by the media for our EU negotiations, in a bizarre way, there is unofficial agreement across the House of Commons that a Tory leadership contest or a general election at any time during these negotiations would be deemed as politically irresponsible now that some progress is being made.

You never know, Theresa May might just surprise us all and survive to fight the next election. A long shot today as she has so many executioners but she is certainly showing an ability to survive mainly down to a lack of credible universally accepted alternatives. She did, after all, beat Corbyn, and many forecasters currently predict the Tories would lose if they took him on today with a new leader, regardless of whom that might be. For now, commentators are talking of a Christmas rally, which is seasonally probable and with Trump’s tax bill just around the corner, we wouldn’t bet against it. Some Christmas cheer for Mr Trump to raise a tweet to.

Sterling Under Pressure Despite Brexit Progress

Sterling was on the back foot last despite Brexit negotiations finally making it beyond the initial “divorce” stage. The domestic currency had rallied over the previous few weeks as negotiations progressed and it became apparent that issues such as the Irish border, citizens’ rights and outstanding payments into the EU budget would be resolved. However, thin liquidity and concerns that the second round of negotiations would be far more difficult than the first stage pushed the domestic currency back into reverse. It declined by -0.4% against the US Dollar to $1.33 and by -0.6% against its European counterpart to just €1.13.

In the equity markets, US companies showed no signs of slowing down as the S&P500 and Dow Jones both hit record highs once again. The S&P rose by +0.9% for the week as a whole, benefitting from strength in the financial and healthcare sectors during Friday’s trading. Domestically, the predominantly internationally exposed FTSE100 benefited from the weakness in Sterling, recording a +1.3% gain. European bourses however endured a negative week with the German DAX30 and French CAC40 declining by -0.4% and -0.9% respectively. In Japan, the Nikkei225 came under pressure from weakness in the telecom sector to post a weekly decline of -1.1%.

It was a busy week of Central Bank activity with the Federal Reserve, Bank of England and European Central Bank all hosting policy meetings. The Federal Reserve once again elected to tighten policy and lift rates although markets had largely already baked expectations of a move. 10-year Treasury yields were therefore largely flat for the week at 2.356%. Domestically, 10-year Gilt yields reduced by 12 basis points to 1.188%.

Oil endured another volatile week following the news that one of the major pipelines in the North Sea would be shut down for repairs. Brent Crude briefly hit a 2 year high of $65.83 a barrel before retreating and closing the week -0.3% lower at $63.23. Gold briefly slipped to a 5 month low before a late week rally helped the precious metal end the week in positive territory, rising by +0.5% to $1,254.69 an ounce.

The Week Ahead

It’s another busy week for macro data as statistics agencies around the world look to get their final releases out before the end of the year. The most significant are the final Q3 GDP revisions by the US and the UK although both are expected to be unchanged from their previous calculations (+3.3% and +0.4% respectively). There are several other key US datasets to keep a close eye on including the latest durable goods orders, consumer sentiment as calculated by the University of Michigan, new and pending home sales. In Europe, the inflation data for November has already been released (in line with expectations at +1.5%) whilst in Japan, the BoJ hosts its final monetary policy meeting of the year later in the week. There is nothing of note expected from China.