Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Another week, another vote
Steen Jakobsen
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.
Prime Minister May is set to appear before Parliament again on Tuesday evening with her profoundly unpopular plan. With this, the seemingly eternal Brexit saga enters its final phase... or does it?
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:
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:
I have since last year believed that the only tangible solution to Brexit is an extension of Article 50. This is simply because neither the voters nor the Parliament seem to know what Brexit was actually all about.
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:
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:
• A significant majority of 67% support a Brexit in which the UK stays in the EU’s single market and customs union, avoiding the need for checks anywhere, the Irish Times/Ipsos MRBI poll showed.
• 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.
• 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.
The only thing keeping the UK going in growth terms is retail spending, which should and will be impacted by an extension.
Conclusion
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."
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."
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