Tatton News Archive

New article from Tatton Investment Management: Brexit breakthrough versus Brexit fatigue

21 October 2019

We have witnessed a second week of improving sentiment in global capital markets, with most equity markets trending higher and bond yields continuing their recovery. However, this was nowhere near the euphoria levels that appeared to grip UK and EU politicians after having secured consensus over another iteration of the UK’s Withdrawal Agreement from the EU. It would have been reasonable to expect a significant rise in the UK asset prices (which are undervalued relative to their global peers), given so many commentators already celebrated the ‘end of Brexit uncertainty’.

As it happened, it was once again the UK’s £-Sterling which became the focal point of the shift in sentiment. Just as the currency fell after the Brexit referendum in June 2016, it now rallied – although at a slightly more subdued rate of +4-5%. Given that there continues to be great uncertainty whether the new Withdrawal Agreement bill will find sufficient support in Parliament, the currency appreciation seems to be a reflection of the likelihood of an imminent ‘No-Deal’ outcome: the implied probability is now near zero. For further currency upside, and a general reappreciation of UK assets, the UK economy would need to be freed from more of the ‘uncertainty shackles’ that Brexit has created.

At the time of writing on Friday, there is a consensus emerging that the Johnson government will lose the vote in Parliament on Saturday, but that the bill might still pass, subject to either a general election or a confirmatory referendum. This would explain why capital markets did not quite share in the general excitement that the Brexit years may be coming to an end. As we have stated before, 31 October 2019 is highly unlikely to really mark the end of the process, however it may mark the beginning of the end of the Brexit preparation process.

Avoidance of a No-Deal outcome and the return of some level of certainty about the future trading relationship the UK will have with its neighbours will be positive for the economy. However, there is the risk that policymakers’ Brexit fatigue might lead to rash decisions without the necessary scrutiny, which could endanger the integrity of the UK as a union further down the line. Listening to and reading politicians’ and journalists’ interpretation of what is now on offer as a route to Brexit also makes us wonder whether there is a sufficient understanding about the potential costs and benefits of one choice over the other. The darkest days of the UK’s Brexit crisis may be behind us, but it will take much more than a week for the darkness to disappear.

While the Brexit developments were clearly a positive for general economic and market sentiment, news-flow elsewhere was more mixed and therefore did not quite justify the further improvement in capital market outlook mentioned at the beginning. China posted its lowest quarterly GDP growth in 30 years (although its ‘low’ 6% growth rate would fill other countries with joy). Nevertheless, this increases the probability that the Chinese leadership will step up its stimulative policy measures – with at least some positive demand overspill to the rest of the world.

On the US side, the announcements of corporate earnings results for the third quarter have started. But they are overshadowed by nervousness that profits may have declined for a third consecutive quarter. The initial batch of results was somewhat encouraging, but further developments will have to be closely monitored.

More concerning was yet more erratic behaviour from president Trump, which has made an increasing number of observers doubt his state of mental health. We would not want to go quite as this far, but it does seem that more and more of those who used to restrain his immediate impulses have been pushed to the side. Either way, the recent behaviour increases the likelihood of further significant missteps like the Ukraine affair and of handing control of northern Syria to Russia. This in turn looks increasingly as if it will limit Trump’s chances to even be the Republican’s 2020 presidential nominee – let alone keep his office as President. Given he appears to have become more of a liability than an asset for the US economy, this may be seen as another positive political development of the past week.