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15 March 2019

The febrile state of UK politics and its journalists might get you thinking that the UK markets were expiring as fast as the Brexit deadline. Certainly, there’s been a bit of to-ing and fro-ing in the currency market although the moves were miniscule in comparison to the aftermath of the referendum (or the leaving of the exchange rate mechanism in 1992).

The events of this week seem to have been forecasted rather well by many; for months now the consensus central scenario has been a soft Brexit agreement with a delay in implementation:

The possible scenarios depend firstly on “Meaningful Vote 3” (MV3 as it has come to be called). Just like many 3rd movies in a series, MV3 has the same plot with the same lead actor as MV1 and MV2 and the markets think the twists will still end up with Liam Neeson winning.

A possible twist might be that any further sequel has a different lead actor.

A vote against MV3 would leave Theresa May in ostensibly the same position as before but with her party-political capital spent. She’s been showing signs of leader-exhaustion (isolation from her own natural support) and we think MV3 failure might end her tenure. The Conservative Parliamentary Party has a hard-Brexit majority so a new leader would probably be of that hue, and May would find that difficult. At the same time, May’s energy remarkable sense of duty might not be enough. Indeed, her other characteristic, dogged self-belief has been under siege since she failed to get any movement from the EU.

Sterling has been the clearest barometer of the market’s Brexit assessment and we end the week with the Pound at a high. There are several reasons to think it may go higher, but we point out below that, as well as several dangers in the no-yes scenario, the UK’s economy was not in the best of shapes before the Referendum. Whatever the outcome, the drama has impaired the economy further. Further upside for sterling is probably limited from here no matter what happens next.

Interserve did not gain shareholder support for its rescue plan and has gone into administration. It will operate “as normal”, but extended administration is very difficult for an employment-intensive firm, especially one which has a problem finding suitable labour in a tight market. This also pressurises the buyers of its services. The Brexit issue may not be the only crisis for the government to have to deal with in the next few weeks.

Away from the UK, everything looks rather stable in markets. Equities have headed higher despite weakish data (mostly from China where industrial growth moved down to +5.4% year-on-year, significant in that a 6% floor was an article of policy until the recent congress). Everybody seems to be betting that global monetary and fiscal policy authorities are either at the point of reacting to weakness or have already begun.

Financial conditions have eased substantially, with the Fed leading the way in signalling dovishness. This has fed through to an increase in dollar-based lending across the globe, US broader monetary measures starting to expand, and funding signals like cross-currency basis swaps being at the easiest point in months. All well and good.

We’re getting back to valuation levels which look less good. Not bad, just not good. Meanwhile, the markets have gone back into “goldilocks” comfort territory – a dovish view of policy reaction functions amid soggy economic data. It’s helped by the earnings report hiatus, the mid-month pause in economic data and strong fiscal year-end retail flows into ETFs.

A weakening in rhetoric coming from the US-China trade negotiation parties and a delay in a summit suggest we could be heading for a bit of a wobble over the next week or two.