Eq: Dev ex-US
Just a couple of days ago it seemed like the UK and EU were on the verge of coming to an agreement over Brexit. Now, just 48 hour later, a deal actually seems further away than it ever has. Reviewing UK headlines, the irony of PM May’s proposed deal is that it did what no one else has been able to—unite Britain. However, the unity is driven by shared hatred from all sides over what a terrible agreement the government has proposed. Numerous government ministers have resigned on the back of the proposal.
FINSUM: The pushback to this deal has been more than anyone would have anticipated. A no-deal Brexit looks increasingly likely.
The Brexit deal has taken so long to figure out that it mostly seemed hopeless. Markets were legitimately pricing in the chances of a no-deal Brexit. Now, the EU and UK have announced they have come to a provisional agreement. While that is cause for some relief, it is very far from a done deal as both the UK and European Parliaments need to endorse the agreement. The UK side in particular may be tricky as PM Theresa May needs to rally an extremely factionalized government behind her.
FINSUM: This could go many ways, but we think either everything will just fall into place quietly, or there will be major fireworks
In what could be a sign of a looming recession in Western countries, the EU just released its worst GDP figures in four years. The third quarter produced just 1.7% growth across the EU, the worst number in four years. The pace slowed from the second quarter, when growth was at 2.2%. Oxford Economics commented on the numbers that “‘temporary factors’ have been overplayed to justify the slowdown in the eurozone economy at the start of the year, and that risks are clearly skewed to the downside.” Notably, Italy produced no GDP growth in the third quarter.
FINSUM: We wonder if this is a case of the EU suffering its own problems, or whether it may be systemic and spreading.
Beijing made a big proclamation yesterday. The country is in the midst of a brutal bear market—its benchmark Shanghai Composite has fallen 27%—but yesterday the government made a big announcement. It said that it would do “whatever it takes” to stop its falling stock market. A large pledge of support came from Xi Jinping himself, which given his grip on power, means that it can likely be counted on. One analyst thinks the bear market might be nearing its end, saying “Bottoming is a process, and we’re starting to see some evidence of reversals and lows taking shape”.
FINSUM: The big x-factor for China is that a trade war and tariffs hurt them much worse than the West, so it is very hard for us to agree that the market rout there is ending.
We don’t cover the Brexit saga very much, mostly because it doesn’t seem to have a great deal of relevance to the US. However, interesting news is out today: the UK’s Labour party is trying to get a second Brexit referendum going. The political details are complicated, but the general plan is to derail the government’s current Brexit plan, and then hold a general election that could work as a replacement for the first Brexit result. A Labour party’s spokesman says that it is a “sequenced, structured” strategy.
FINSUM: We have maintained throughout this saga that the UK should not leave the EU. It is still going to have to be heavily involved with the EU for economic and political reasons, and if it leaves it will simply go from a rule-maker to a rule-taker.
The big recovery after the huge losses in Italy might finally be underway. While downward pressure on Italian assets had subsided, there is now a big rally happening. The catalyst is that the country’s finance minster has just pledged that Italy will stay in the Euro, helping ease the market’s largest worry about the political crisis in Rome. The minister also pledged to avoid financial instability.
FINSUM: Italy’s two-year bond has already seen its yield fall 100 bp! That is quite a response. To be honest we doubt this pledge amounts to much, but it is good signaling for the market.