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. 

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


If, by the time you read this, 48 letters expressing No Confidence in Theresa May as Conservative Party leader have been received by Graham Brady, then:

  1. The vote should take place within 24 hours
  2. If TM gains votes from 158 of her MPs (half the parliamentary party) then she stays as leader and cannot be challenged again for 12 months
  3. Expectations are already being trailed that a loss of over 100 would be enough to make her go.
    – We would disagree. Any woman witnessing Thatcher’s enforced departure would not leave the top job unless the numbers make it so.
  4. Even the most extreme Brexiteers and Remainers fear they don’t have enough momentum to carry half of the party with them. That’s why they couldn’t move until TM was knocked out onto the canvas. They had to be certain she was gone.
  5. But even now, Conservative MPs face a dilemma. 
    – Once TM goes, one of the final candidates won’t be Brexity enough for Brexiteers or Remainy enough for Remainers. That means both factions have a 50% chance of losing out.
  6. The odds however favour the Brexiteers. The final decision on leader comes down to the Conservative Party membership, and they’re certainly on the harder Brexit side of things.
  7. In trying to move the odds in their favour, it’s no surprise that neither Brexiteer nor Remainer can yet agree on who their own candidate should be.
    – Leading ERG member Steve Baker has told Brexiteers who quit the Cabinet to “work out between them which one of them is going to be our candidate to unite the country” – i.e. Boris Johnson, Dominic Raab, Esther McVey and David Davis

So the calculation runs thus:

  • Are you confident that if TM goes, you’ll get someone you prefer in her place?
  • For Brexiteers, the answer is probably Yes. For Remainers, it’s less clear cut.
  • Or are you just so sick of the shambles, you just want to gamble

So how many Tory MPs are Remainers?

Here’s our MP by MP analysis which shows the shape of the Conservative Party on our scale of -15 for most Remain MP to +15 to most Leave MP:

One third of the Party ranks at a zero or below. This is the Remainer rump.

And where can Theresa May find her magical 158 MPs? Everyone ranking at +2 or below would get her there.

Is there a compromise candidate who could tempt some of those away from her?  Well here’s a map of Cabinet MPs from just before Raab resigned:

Can Javid, at +5, become a kind of compromise candidate? Likes Leave enough to please the membership but Remain enough to calm his Remainer colleagues?

He won’t get the chance if 158 MPs decide they prefer the devil they know. So this contest will only be called when it has the momentum the Prime Minister’s detractors desire. It might be tomorrow. If it’s not, it is still coming. The end game of power, and the chance to shape the Brexit of your dreams, are within your grasp. It’s just a question of timing.

And while it lurks, the Labour Party can continue to hold fire on their own No Confidence vote, despite Vince Cable and Nicola Sturgeon publicly lambasting Jeremy Corbyn for not doing so already. Why pull the trigger if the Conservative Party can set off some friendly fire shots that weaken their already divided party?

Even if TM wins, she won’t be out of the woods. The pressure cooker will still be steaming. Every attempt to try to preserve the status quo is tinder for the fire for those who desire a very different Brexit outcome.

The upshot for financial markets is that we are entering a much more significant crisis period. The chances of either No Deal or No Brexit are rising. All these months of inaction were not a reason to be calm about the future. They were merely time for some shadow boxing and weapons stockpiling before the bombs start to go off. We continue to expect a sharp dislocation in GBP assets in the next couple of weeks as this becomes apparent.