Market Insights

Nothing. Has. Changed? Part V

  1. The EU27 has offered the UK an extension until 31st October:
    • which can be ended at any time a deal is done
    • there will be a review at regular EU Council Summit on 20-21 June
    • if the UK doesn’t take part in the European Parliamentary elections it must leave on June 1st without a deal
  2. This is shorter than EU Council President Tusk had recommended and is a compromise between Germany’s year-end suggestion and France’s hardline stance of pre-European Parliament elections
  3. It is the worst of all worlds:
    • Removes time pressure to force a decision but doesn’t quite provide enough time for air to clear through a General Election or Second Referendum
    • A conclusion any time in 6 months along with cliff edge on 1st June makes it very difficult for businesses to plan ahead
    • With Party Conference season in Sept/Oct, it’s not clear anything will be sorted before the Conservatives choose a new leader
    • Nor long enough to be clear that EU will be dealing with Jeremy Corbyn
  4. It is the most inconclusive of fudges
  5. But we do now know:
    • There are now two No Deal cliff edges of 1st June and 31st October
      • A mechanism for No Deal has now been introduced, by not participating in European Parliament elections. Brexiteers could bring Vote of No Confidence in Govt on 22 May, for example:
    • Extensions can be long and can be numerous – Risk of No Brexit has increased
  6. Expect political paralysis in the UK for the next six months:
    • Fear of Boris means Remainers won’t depose May, while Fear of a Remainer means the Brexiteers in Cabinet won’t move either
    • Keeping TM running the Brexit process benefits Labour, who can keep the focus on her inept leadership and split Party while avoiding that spotlight being shone upon them
    • Remainers and Brexiteers can use the delay to embolden momentum for their cause: voter anger to rise both for those who now want to jack in the whole process and for those who want to walk out with No Deal
    • TM will not herself resign as she is Brexit Project Manager: She still has Plan A, pass a deal, and she won’t give up. In her press conference she confirmed again that she wants to leave before 30th June. Expect MV4 and more in the next few weeks.
    • She is still trying to balance both halves of her party:
      • Making the extension flexible to be ended at any time, not just at the one review date as the EU27 initially suggested
      • Confirming the importance of trying to avoid European Parliamentary elections by making that a staging post
    • It works in everyone’s favour to blame TM for everything. She’s inflexible in cross-party talks, or over the backstop. She goes back on her word. She’s responsible for a Bad Brexit. Or for leaving with No Deal. Or ultimately for not leaving at all. 
    • No one is incentivised to come to TM’s rescue, so the stalemate will persist
  7. This is not positive for the UK economy or UK assets in the long run. Bad decisions will be made, or worse, no decisions at all. And meanwhile the future of the UK’s relationship with its closest trading partner is no clearer than it was two and a half years ago…
  8. Final point – House of Commons order paper for tomorrow adjourns business until 23rd April, aside from a business motion tabled for 5pm, which could require MPs to sit on Friday 12th April. Time for TM to force one last meaningful vote before the Easter holiday….??

Lewin Amendment Explainer

Yvette Cooper and Oliver Letwin again attempt to take control of Parliamentary business for the third time. However, instead of another series of indicative votes, Cooper has presented her own legally binding Bill aimed at forcing the Prime Minister to extend Article 50 and avoid No Deal next Friday (Parliament has published their own explainer here). This is different from all other amendments as, if passed, it would legally require the PM to do as Parliament mandates. Any extension would of course still depend on unanimous agreement by the EU27 member states.

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At 5pm BST, MPs will again vote to take control of the Parliamentary timetable in order to allow time for the above Bill to be put forward. Should the motion be agreed to, the Bill would be pushed through Parliament at superspeed with time allocated for the first reading (once the motion is passed), the second reading – at 7pm – and then the committee phase which will be at 10pm, all in one day with the Bill then going to the House of Lords tomorrow.

There are (at the time of writing) three amendments tabled to Letwin’s Parliamentary Business motion:

  1. Amendment (B): Mark Harper (Con)
    • Leaves the motion as it, but seeks to delay its progress by moving the allocated Parliamentary time to TOMORROW
    • Backed by pro-Brexit Conservative MPs looking to frustrate any extension of Article 50
    • Unlikely to pass given Parliament does not want No Deal
  2. Amendment (C): Robert Syms (Con)
    • Cooper Bill can only proceed if TWO-THIRDS of MPs vote for it at the 2nd reading
    • Another Brexiteer attempt to stop any extension of Article 50
    • Unlikely to pass for the same reasons as above
  3. Amendment (A): Hillary Benn & Margaret Beckett (Lab)
    • Asks for a series of indicative votes on Monday 8th
    • This does NOT take into account that May has now agreed to hold a series of Govt-endorsed indicative votes should her efforts with Corbyn fail, although it does now act as an insurance policy to give time for this
    • Likely to pass given the previous support for this type of amendment

The Cooper Bill itself can also still be amended.

We expect the Govt to whip against the main Letwin business motion and the Benn Amendment. It will be a close call whether they pass on this occasion, given that the PM is trying to move the Brexit process along herself with last night’s announcement of cross-party talks.

No Deal in Two Weeks Time

  1. TM loses again, for two reasons:
    • Hardcore Conservative Ideologues
      • 28 Brexiteers voted No
      • 6 People’s Voters voted No
    • Implacable Labour MPs
      • Only 2 more Labour MPs switched from No to Aye
      • Only 2 Labour MPs switched from No to Abstain
  2. Next steps are a charade on the path to No Deal
    • Indicative Votes on Monday is same as this week: no way to demonstrate preferences nor for options to be knocked out
    • Parliament “taking control” is just a way for individual MPs to put their views on the record: they’re attempting it again for Wednesday
  3. Meanwhile the clock ticks down
    • Tusk announces EU Council Summit for April 10
    • European Commission announces “No Deal” ‘is now a likely scenario’
  4. TM hopes to bring MV4 before then…
    • ….but the two reasons she lost won’t go away
      • Unless Labour wobblers fear No Deal
      • Unless Tories hardliners fear No Brexit
  5. That leaves us in a stalemate.
    • The EU could only offer a long extension if it looked like the House were able to move towards something like a Customs Union. If not, they will say Exit Now or Revoke.
    • On that choice, Corbyn abstains; hardliners of each side go for their choice; and the moderates have to decide if they want to deliver Brexit that 420 consituencies voted for
  6. Before we get to that, the General Election threat is real
    • BUT remember under Fixed Term Parliament Act, if a vote of No Confidence takes the government down, there are 14 days to form a new coalition that can command the confidence of the House
    • We could get Corbyn as PM in just a few weeks’ time

It is becoming clearer and clearer: there is no path to stop No Deal, as our analysis has always suggested

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. 

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.
Commerz/Deutsche

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.

ECBInflation

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.
LotteryReceiptsandTax

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.
FedMonetaryPolicyFramework

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.
DataSourcesforInvestors

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.
India

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.
FreeExchange

– Summarised by BallyMoney, 3 March 2019