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“Not the end of the world”

31 August 2018

But not a walk in the park either.
(Theresa May, Tue 28 August 2018)

That’s how the Prime Minister described the prospect of a ‘no-deal’ Brexit.

After a summer of dithering, does this mean the UK’s government is back to “Brexit means Brexit” and that’s how it will be next March – seven months from now?

No, that is not how the prime minister’s comment on what a No-Deal Brexit may mean for the country should be seen. To the contrary, after a week of far more conciliatory language than we have heard since the very start (on both sides of the negotiating table), odds for a softer Brexit should have significantly increased. That’s at least what currency markets signalled, where the external value of £-sterling rose notably on the news.

However, let’s make no mistake – should the Brexit negotiations in November end with no deal and the resumption of WTO tariffs coming immediately into force by March 2019, then all involved parties would at the very least face a likely recession, caused by the shock of having to adjust without any transition period.

Theresa May’s statement is only plausible if businesses are given a couple years notice to adjust to a significant change in their trading framework. Indeed, I have not come across a statement from a government representative with responsibility in the matter suggesting ‘no-deal’ means an immediate return to WTO rules. Please see this as the context for my choice of the cartoon this week.

We therefore read the Brexit newsflow of the past week as further evidence that March 2019 will only mark the starting point of the journey towards whatever type of Brexit divorce we end up with in November. We have a more in dedicated article on the subject: UK: Good news is bad news is good news.

Going beyond UK, capital markets had a bit of a mixed week, with equity markets rising at first when US president announced an end to trade wars with Mexico and appeared to suggest that trade frictions with China would be resolved in due course – Excerpt from a series of tweets from his account:
As for the U.S.–China trade disputes, and other differences, they will be resolved in time by President Trump and China’s great President Xi Jinping. Their relationship and bond remain very strong.

However, Trump’s insistence later in the week to implement the next round of tariffs against China regardless sent stock markets into reverse and erased the earlier gains. Nevertheless, before this retreat, US stock markets hit new all-time highs, which is triggering concerns about overshooting US equities not dissimilar to what we saw in January, when they experienced their last ‘melt-up’. More in the article: Is economic strength behind the US equity market ‘melt-up’?, where we discuss that there is undeniable economic momentum behind the US economy, but we may also have reached the point of ‘as good as it gets’.

Meanwhile in Europe, focus has once again returned to Italy and its potential to cause another sovereign ‘debt wobble’ should certain things go wrong. With all the scare mongering going around we would like to inject a bit of levelheadedness and point to some facts, figures and political dynamics which make us expect that the clamour is merely another sequel in the never ending series of Eurozone scare stories.