Market Insights

The PM will take No Deal over No Brexit

++ The PM tonight clearly showed that she will take No Deal over No Brexit ++

  1. Theresa May’s speech tonight was clear and assertive: Back my deal or it’s No Deal or No Brexit
  2. That line of argument is not new, but the emphasis wasAll of her criticism was reserved for No Brexit.
    • “I am not prepared to delay Brexit any further than the 30th of June”
    • “EU elections would be bitter and divisive” at a time when the country needs to come together
  3. Yes, she is listening to the half of her own party who voted against extension last week
  4. Yes, she is also listening to “you the public”…”you have had enough, you are tired” and you want us to get on with it
  5. But yes, she is also setting up the blame game. If this doesn’t pan out, it’s the fault of MPs, not her.
    • “Parliament has never decided what it wants, only what it doesn’t want”.

She is absolutely right.

This speech matters because right now the perceived wisdom is that No Deal cannot happen. Two reasons are usually cited:
– Either Parliament will force matters out of her hands
– Or the PM will fold and beg for longer and longer extensions

This speech removes the second option. She cannot make this speech and then turn around in a week and say OK then, let’s kick this can further and further down the road. More importantly, she doesn’t want to. 

I have met Theresa May on a number of occasions and she takes her responsibilities very seriously. Other MPs talk of how she takes a long time to make a decision but once she has made it she is unmoved from it. She sees it as her duty to deliver Brexit. Now, she might be making a total hash of it, and it might be a Brexit that no-one wants, but by God this bloody difficult vicar’s daughter will do it. We will be out, by hook or by crook.

So how about option one, Parliament taking matters into their own hands? It’s evident that they want to do so, and but for a few votes would have done so already.

But I have also been struck in my recent meetings with MPs that they don’t actually want to run proceedings. They are, as TM pointed out, keen to tell you what they don’t want. But they’ve never decided what they do want. At one meeting today an MP told me that they just haven’t been given the chance.

Guys, Trump makes policy on Twitter. True leadership means grabbing the bully pulpit and driving opinion onto your side.

Another MP told me that they’re working very hard on a cross-party consensus. They’re part of Tory MP Nick Boles’ collective who have, to be fair, at least drafted an alternative policy with “Common Market 2.0“. They do have some momentum behind them.

But the same plea about being pragmatic and bringing together those from all sides falls on deaf ears when you see that the Labour MPs involved in the Boles plan have voted against the Prime Minister’s Deal. Even Nick Boles himself managed to vote for her Deal on both occasions, given that his vision of a Norway+ solution can still be achieved by getting through into the transition period. Finding a solution to Brexit can’t be easily done with two parties so long at loggerheads.

So yes, give control back to Parliament. Let’s go from two sides on a negotiating table to 650 on the UK side representing 4+ parties versus 27 on the EU. I think we have all sat in meetings of large groups of people for long enough to know that this path will not lead to a simple and quick solution.

  1. Tonight’s speech shows that for Theresa May, No Deal is the lesser of two evils.
  2. Today’s discussions with MPs show that there is still no majority for a course of action to prevent No Deal.
  3. Our database shows 21 Labour MPs have to switch in order for the PM’s Deal to pass

1+2+3 = TM Deal is voted down + Parliament tries to take control but is unable to find an alternative + the PM accepts No Deal as the path to delivering Brexit. 

Something Has Changed?

++ No Extension and No Deal creep closer ++

  1. Two important documents were released tonight.
    • The Unilateral Declaration by the UK lodges our interpretation of how we can unilaterally suspend the backstop.
    • The Instrument relating to the Withdrawal Agreement clarifies how arbitration works if either party wants to suspend the backstop.
  2. The two key paragraphs from these:
    • “Nothing stops the UK from trying to walk away”
    • “if you try to impose the backstop on us forever, we can walk away, unless the arbitration panel says you’re not trying to do that”
  3. We await Attorney General Geoffrey Cox’s advice, but there is a legal argument to be made here that the UK can initiate exiting the backstop and make a case with the arbitration panel to ignore the backstop.
  4. Unfortunately, there is also the legal argument that the UK can’t jump to the end of the process and just leave:
    • Keywords in the UD: “could ultimately lead”
      • It’s not a given. Saying “the backstop is dead” doesn’t mean it is.
    • Keywords in the Instrument: “unless and until the offending party has taken the necessary measures to comply”
      • Even if the UK believes the EU is trying to force it into an indefinite backstop, that depends on how the arbitration panel sees it
  5. The Motion that will be voted on tonight reflects that this is not a panacea for the backstop, as it merely “reduces the risk” of being in the backstop forever, not remove that risk altogether:
  6. This is just our interpretation. The truth is that MPs can spin this change however they want to. There is room to argue that you can now support the Deal. Brexiteer Mike Penning has just done so.
  7. He declares “no one is more Brexit than me” but he’s not a member of the ERG. However if we use his Brexit ranking of +5 then we can look at other MPs who might ideologically be able to shift (-15 is the most Remain, +15 is the most Leave). Of those MPs who have wanted a backstop renegotiation, 42 are as Brexity or less than Mike.
  8. If all of those flipped to backing the Deal, the PM would lose by 146 votes rather than 230.
  9. Gaining more than that depends on the DUP. Will they be willing to risk their Unionist credentials, their entire reason for being, on a legal interpretation that Northern Ireland could remain within the UK? Our man BallyMoney flags up this song and this century-old speech to point out that ‘No, they won’t’. Why would they? To go down in flames to protect the Union is all they’ve ever fought for and they’ll keep on fighting that fight, no surrender. Just think of how it will play out if the arbitration panel keeps us in the backstop; headlines such as “faceless judges wreck our union” will be just the start of it.
  10. So, the PM’s Deal will fail.
  11. If it fails by more than 50, as looks likely, then there is an even more important paragraph from a document tonight. This is the last part of Juncker’s letter:
  12. In other words, an extension isn’t guaranteed, and even if you get one, it’s going to be a short one.
  13. No extension and No Deal creep closer.

The Economist: Finance and Economics articles summarised (3 March 2019)

++ NEW FOR 2019: Thanks to our contributor BallyMoney we will now be bringing you a summary of the finance and economics articles from each week’s Economist ++

A Commerzbank/Deutsche merger would solve neither of their problems
Germany’s banking market is crowded with 1,580 banks grouped into three “pillars” of private, public and co-operative. The public contains 385 Sparkassen (savings banks) and 6 Landesbanken (clearers for Sparkassen). The 875 co-ops have Germany’s second largest DZ Bank, as their clearer. German banks’ average ROE was 1% in 2016, although DiBa (ING’s online version) managed double digit returns. Deutsche Bank only started adapting to the financial crisis of 2007-2008 in 2015 and in 2018 its ROE was 0.4%. Commerzbank’s was 3%. The German govt would like them to merge, although they have limited say as they only hold 15% of Commerzbank and none of Deutsche. A merger would mean they could cut retail costs and the two together hold 20% of total deposits; also Commerzbank mainly covers the Mittelstand (private export-oriented firms) and Deutschebank concentrates on bigger companies. However Deutsche is still tying two systems together with Postbank, meaning Commerz would be a third and both banks are slashing costs now in any case. Germany’s banking industry needs to consolidate faster.

Will the ECB be forced to cut rates?
They have been patiently waiting for inflation to rise. It hasn’t. Core inflation has hovered around 1% since 2015 and that’s despite robust economic growth in 2017 and 2018. Now that growth is slowing there is a concern inflation will too. See chart below for the medium term inflation-linked swap rate, the ECB’s favoured guide to market expectations of inflation. They have committed to keeping rates on hold through the summer but they might have to push this out.


Governments are turning receipts into lottery tickets to make it harder for retail businesses to evade tax
Taiwan was the first in 1951. Worldwide value-added taxes are 20-35% of government revenue but as much as a third of this may be lost through under-reporting. If customers receive receipts with a code that enters into a central prize draw then sales will be recorded and not go unreported by the retailer. Slovakia has had a scheme since 2013 but thinks it only added EUR8mio to VAT receipts. São Paulo is so sure its receipt lottery increases tax collection, not only do they enter the draw but they receive a 30% rebate of the sales tax paid.

The Federal Reserve is reviewing its monetary policy framework
With unemployment at its lowest level in decades, inflation close to target and interest rates globally close to zero, now seems a good time to see if the Fed’s policy toolkit can be expanded. There is concern come the next downturn there will be no room to act with monetary policy. Average inflation targeting is one route. where the 2% target is spread out over time. This means that overshooting is only compensating for undershooting, but people have to believe the Fed can and will do this.

Asking the CEO of a company what is going on may not give you the best answer
Elon Musk has made claims via Twitter that saw him fined and confused investors, but there are alternative data sources. Quandl, a data provider, receives data from insurance companies that tell it how many insurance policies are being taken out on Tesla cars so it can work out how many are on the roads. Bloomberg tracks Vehicle Indentification numbers (VINS) so it can tell how many Tesla are registered. Evidence Lab took apart a Tesla Model 3, Chevy Bolt and BMW i3 to find out how much each vehicle cost to make, thereby calculating when companies become profitable. Tesla’s build quality was poor yet costs were high.

Narendra Modi has not made the decisive break from the past that was hoped for
No big reforms of the labour market, no scrapping of the employment guarantee scheme or identity scheme, but he did implement the nationwide value-added tax that was previously proposed by Congress. Continuity persisted despite Modi’s party winning a rare majority in parliament. His power is checked by the upper house, courts, public auditors and the states. He did cut red tape (India has risen 65 places in the World Bank’s ranking of ease of doing business). He removed fuel subsidies helping to beat inflation and reduced corruption. His most innovative decision was his worst, cancellation of high value bank notes. The government was surprised when most of the notes were redeemed. It seemed to do little harm to the economy but this is hard to know as the government has since discontinued and delayed official data which did not flatter it.

The world’s manufacturing upswing has slowed
It started around the time Trump raised tariffs on washing machines as the govt ratcheted up its trade war with China, but there’s more to it than that. The downturn looks like 2015, which was partly due to the bust that followed the shale boom. China was also a large factor then, as they reined back credit following the financial crisis and tried to implement measures to open their financial markets, which were premature and resulted in money fleeing the country and stock prices crashing. The taps were then turned back on. The “augmented” budget deficit (i.e. the real budget deficit when taking govt’s special purpose lending vehicles etc into account) rose to an estimated 15% of GDP. This was then turned down again. China should not matter so much given its tight capital controls make financial links with the rest of the world modest, but the world has grown to rely on them too much. With rates at or below zero there’s not much room to manoeuvre. China has turned on the taps again.

– Summarised by BallyMoney, 3 March 2019

Sir John Curtice Speaks

+++ TOP LINE: Government could fall in next few weeks as MPs panic and no compromise on Brexit is acceptable either to Parliament or the population +++

Full recording:

In our discussion with John Curtice he presented the following facts:

  1. There are now four spaces for UK Political parties to occupy
    • Classic Economic Left vs Right
    • New Social Liberal vs Conservative
  2. Brexit cuts across the latter
    • Remainers = Social Liberals
    • Leavers = Social Conservatives
  3. The new Independent Group occupies the former ground. “Calling it a centrist party isn’t a helpful term“. “On Brexit, regard them as extremists“. It will cost votes for both main parties. According to British Social Attitudes survey 2015, social liberals account for:
    • 37% of Labour voters
    • 33% of Conservative voters
  4. The 2017 Election was about Brexit and the widening of this cleavage:
  5. The Brexit division is deep and unresolved.
    • 75% of Leave voters want a Hard Brexit as their first preference
    • Half of Remain voters want to Remain completely
    • Norway & Customs Union only attractive to 32% of voters
  6. There are no acceptable compromises, leaving Theresa May in the unenviable and impossible position of pleasing almost none of the people all of the time
  7. Polling on a second vote suggests the wording is key: if it’s a People’s Vote it yields more support than if it’s a 2nd Ref. “You cannot unambiguously say there is clear support for a Second Referendum“.
  8. Opinion has shifted against Brexit, but the “Remain lead rests heavily on whether those who did not vote would turn up to vote this time“. “Loyalty of Leave voters has declined to a degree“.

He also notes:

TIG is similar to SDP in that it arose from division over Europe, and it will likely have to form an alliance with the Lib Dems to gain enough ground to matter. If they can get >35 MPs then they will become the 3rd largest party which will award them privileges over parliamentary time.

An early General Election would be “disastrous” for TIG but they might do well in the European Parliamentary election as the anti-Farage Brexit Party, should the UK have a vote in those elections.

Few expect Brexit to be wrapped up by 29th March. All the legislation will be held up by the House of Lords anyway.

He concludes:

  • At what point do MPs start to panic?
  • Real risk that if Cooper/Boles amendment fails and TM can’t get her Deal through then the government will fall
  • Brexit has disrupted the traditional pattern of support for the main parties and it’s difficult for them to keep together
  • Brexit attitudes are so deeply polarised that it will be difficult to find an acceptable compromise
  • A second referendum is not a panacea

The full recording is available here & should you want the presentation please email

Whispers in the Corridors of Power

The BlondeMoney team has spent the past couple of weeks on the ground in Westminster, talking to MPs, attending Select Committees, listening to speeches and attending dinners. We saw nothing to dissuade us from our core view that No Deal is a clear and present danger.

Our key takeaways:

1. No one knows what is going to happen

We were surprised to find MPs are asking us for the Brexit ratings of their colleagues or the opposition. They want to get a sense of their reaction function. This is why MPs who claim that they can bring 80 or 60 MPs with them (Tory Steve Baker and Labour Lisa Nandy respectively) should be taken with a pinch of salt. It’s 650 individuals out there and each and every one of them has a unique set of battling objectives.

It’s normal, of course, for each MP to have their own opinion. But usually, party discipline dominates. A strong leader with a majority can get a lot done. Even in cases where the leader is struggling (Gordon Brown cf. Tony Blair), the threat of letting in a coherent opposition provides its own disciplining force. Now, the Labour Party is in clear disarray, arguing over whether Corbyn ‘forgot’ to mention the option of a People’s Vote in his letter to Theresa May. This makes the behaviour of your opposition unpredictable, making the behaviour of your colleagues in your own party unpredictable.

2. No one wants to take leadership

Into such a political vacuum, a leader usually emerges. Someone with a burning desire, either for their ideology or for power itself (or both). This then generates momentum whereby MPs divide over whether they are for or against this new force. (e.g. Macron, AOC, Salvini… the list goes on).

Not now in the UK.

That’s because this is a very unique political situation. It is one in which there are no clear winners. It might be well known that you can’t please all of the people all of the time, but the trade-off now isn’t even close to pleasing some of the people some of the time. Deliver Brexit and 48% are already unhappy. Not to mention 52% who find that their version of Brexit, whether it meant reclaiming sovereignty or shutting borders, are unhappy with the inevitable compromise too. Don’t deliver it and the 52% are up in arms, while the 48% despair that the entire process has damaged the UK’s relationship not only with the EU but the rest of the world.

Like Joshua, many have decided that it’s better to sit this one out as it is a game that can’t be won.

3. Everyone is waiting for someone else to do something

So instead we have maneuvering by stealth. The Cooper Amendment can’t be seen to be avoiding Brexit altogether (even though she is accused of precisely that) so it must only call for a Delay. That stays the hand of some MPs who might want to stop No Deal (and we know more voted for the declaration of this in the Spelman Amendment).

The next Cooper Amendment is supposed to assuage fears by merely putting the length of the Article 50 delay into the hands of Parliament to decide, rather than stipulating 31st December 2019 as previously. We even hear that it’s unlikely the Cooper Amendment will be voted on this week, with its proponents preferring to wait until the new alleged Meaningful Vote of 26th Feb, because they don’t want to put it in without knowing it will pass. Tick tock, tick tock.

1+2+3 = nothing happens.

The Brady Amendment succeeded because it was a rare moment where 1+2+3 no longer applied. The Conservative Party were suddenly united (trust in their colleagues’ votes restored), the PM could take the mantle of handbagging Brussels (leadership restored), and yet it didn’t actually lead to any decision being made (leaving someone else to do something). It’s over to the EU now, right?

We know there is growing optimism that TM will return with something that can gain a majority back in Parliament. No doubt there is indeed a lot of behind the scenes legal discussions to create something on the backstop that can be presented as appealing to as many MPs as possible. Boris has broken ranks to suggest he would be happy with an 18-month time limit and an ability to exit unilaterally.

We would go back to the numbers. Renegotiating the backstop wasn’t even the primary goal for half of the 118 rebels. Here is the main demand of all the Conservative MPs who voted against TM’s Deal:

Of course, Canada and Norway can still be the path once TM’s transition period is upon us, so perhaps those MPs fall into line. But that leaves once again the intransigent extremist Remainers and Brexiteers, of which there are 28. Whatever the EU concedes, it will once again split Parliament and we will once again face the same problems of 1+2+3.

A delay to Article 50 would only exacerbate that, and we have already seen the impact of Brexit uncertainty on the economy. It’s hard for us to believe a delay is positive for UK assets.

The final conclusion from our trips to Westminster reinforces our concerns over negative future outcomes. The long term occupies minds more than the short term and so the Blame Game is in full swing. Every MP is putting on the record why everyone else is wrong and they are just doing their best.

At the DExEu Select Committee:

  • Brexiteer Dominic Raab and Remainer Stephen Kinnock got into a spat over how negotiations by the former Brexit Sec had reached such a parlous state
  • Raab was repeatedly asked for ‘inside knowledge’ on negotiations as if to expose his complicity in the current backstop debate
  • Raab protested that No.10 gave too much license to the civil service to conduct negotiations as if to argue ‘it wasn’t me’

At the Northern Ireland Select Committee:

  • The DUP pummelled the Labour NI Sec Tony Lloyd with questions about how there would never be a hard border, to the point where he felt he was defending one by admitting “it’s virtually impossible to have physical infrastructure
  • Lady Hermon warned that she saw he had his hands sitting on the actual Withdrawal Agreement, noted that he didn’t want a hard border, and then demanded to know why he hadn’t voted for the Prime Minister’s Deal
  • Conservative MP Robert Goodwill highlighted that as the Common Travel Area pre-dated the UK’s accession into the EU, it could persist afterward too
  • Conservative Chair Andrew Murrison was adamant that as Parliament had voted to activate Article 50 it must proceed and not be delayed

These are all attempts to pin the blame elsewhere and set out their core position:

  • The DUP are on a war footing over a hard border, taking the view that even in No Deal it doesn’t, and couldn’t, be erected.
  • Hardcore ERG similarly do not fear No Deal.
  • Hardcore Remainers want it on the record that this mess is nothing to do with them
  • Just as those formerly in ministerial positions want the same accolade

This reinforces 1+2+3. No one knows what is going to happen. No one wants to take leadership. Everyone is waiting for someone else to do something.

Everyone is letting the clock tick down in order to provide momentum to something other than No Deal. But to avoid No Deal, we need leadership behind an alternative backed by a group of MPs who trust that they have each other’s votes.

In conclusion: We saw nothing to dissuade us from our core view that No Deal is a clear and present danger.