Brexit – Politics is a Game and Neither Side Wants to Concede

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Another deadline and yet the Pound makes its way back through to $1.32 levels this week.

It wasn’t long ago that the Pound was back at sub-$1.30, with Macron’s arm flexing raising the prospects of a no-deal departure.

Since then, the EU has softened its stance and it really is hardly surprising.

With the 2nd wave of the COVID-19 pandemic hitting the EU, the last thing anyone needs is default to WTO trade terms.

Just look how easy it was for China and 14 other Asian nations to close out an APAC trade agreement…

Well, it wasn’t easy, but it certainly didn’t take 4 years. 15 Asian nations with their own currencies and agendas versus the EU project. It is almost astounding that the EU member states are unable to agree with one country. Well, it would be astounding if it wasn’t for the EU hardliners wanting to take over Merkel’s position as the voice of Europe…

Things have changed since the early days, however. Populist governments are abound and few are interested in Macron and a number of other state leaders who clearly have little regard for the minions.

Sadly, it is the “so-called” minions that could bring the end to a project that should have thrived, on paper at least.

Joe Biden to the Rescue

We have continued to hear of Biden’s soft stance on foreign policy. In reality, however, his warning to Britain over the Internal Market Bill and peace in Northern Ireland should be a warning to the EU.

Biden is unlikely to enter the Oval Office and begin targeting the UK from the get-go. That special relationship that many refer to is perhaps more one-sided than many would like to admit.

Unlike other EU member states, Britain has, without hesitation, stood by the side of the U.S even when it was perhaps wise not to.

Until there is a new philosophy in Parliament, Britain’s support is unlikely to waver. The last thing Biden needs is to lose a close ally sitting at the gateway to Europe.

Other EU member states are in a state of flux. While populist governments failed to take over, the threat remains. That means that Britain and the Tories are more important than ever.

Joe Biden and the Democrats are right in being concerned over peace in Northern Ireland. What they fail to consider, however, is that Britain would pay a high price if the Good Friday Agreement fails.

The U.S President-Elect

With Trump as a predecessor, however, Biden has an easier time when it comes to foreign policy. It would be more than a market shock should Biden take a more hostile stance on foreign policy.

Britain should therefore rest easy and supporters of the Pound shouldn’t panic just yet.

The Pound

At the time of writing, the Pound was up by 0.20% to $1.32235.

Off the back of a 0.64% rally on Friday, a 3rd consecutive daily gain looks on the cards.

News of the EU planning to extend the deadline on trade talks has delivered support as has COVID-19 vaccine news.

Both are certainly positives for the Pound.

Brexit, however, remains the greater threat when viewing the Pound against its peers.

Many will wonder why the Pound continues to receive such support when talks are going down to the wire.

It must be the fact that neither side is willing to walk away. There have been many threats of it but none have actually closed the curtain on trade talks.

Perhaps if Trump had won the election, things would be different?

The disagreement over UK fisheries, however, suggests that reaching an agreement is a tall order. Theresa May would have been better off focusing on this aspect of the agreement…

So, the news wires continue to deliver bad news and the Pound continues to hold its ground.

At some point, one will need to give. With all EU member states needing to vote on any agreement, you would think that the Pound would come out 2nd best.

Politics is a funny game, however. Just look across the Pond at Trump’s antics. An unwillingness to concede in the interest of democracy questions the very ethos of 2 party politics. Britain is no different and to be completely honest, the political systems in France, Germany, and beyond have continued to shut out populist governments. Yes, they have a greater voice, but actually running the country is an altogether different proposition.

An overhaul is due, but who would give up the golden egg in the interest of country and democracy? Trump isn’t, so why should anyone else…

Brexit – Another Deadline Gives Negotiators 7-Days to Wrap Up a Deal

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Another EU Summit and yet another Brexit deadline. This time around, the EU Summit on 19th November is said to be the deadline for all deadlines.

While Boris Johnson has attempted to force things along, the EU is now also of the view that an end must come at some point. The November Summit is that point in time.

Updates from both sides of the table suggest that talks are likely to continue until the 11th hour.

As has been the case throughout the summer, UK fisheries and the EU’s access to UK waters remains a key stumbling block.

Until now, EU negotiators have put trade talks largely on ice until a compromise is found on UK fisheries.

For the British side of the table, leaving the EU yet yielding to the demands of Macron would leave Britain in the grips of the Establishment.

It isn’t UK fisheries alone, however. Fair competition rules for businesses and a mechanism to resolve future disputes are also sticking points.

Much like Macron’s stance on UK fisheries, the Establishment is attempting to force British firms to operate under Brussels rules.

When considering the stumbling blocks, it seems unsurprising that British negotiators are making little headway.

Time is running out, however, with negotiators no longer having a cushion in case talks fail to progress.

The only other option is for Boris Johnson to take over and negotiate with EU Commission President Ursula von der Leyen. There is one alternative, though one does not even want to imagine how the Brexiteers would react. Boris Johnson could attempt to extend the transition period to allow talks to continue. Even that may not be achievable, however…

Kicking the Brexit can down the road would be a pointless exercise if an agreement isn’t in place by the November Summit.

That Special Relationship

For Boris Johnson, the gamble of allowing talks to extend beyond the U.S Presidential Election has not paid off.

While President Trump files lawsuits and states recount ballots, the writing looks to be on the wall. It would now be a market shock should Trump manage to reverse the outcome of the election.

Joe Biden has already been in dialogue with the British Prime Minister and the Good Friday Agreement was a hot topic of discussion.

The U.S President-Elect

The markets are making a big deal about Joe Biden’s likely support for Europe. In reality, however, the President-Elect is unlikely to throw the U.S-Britain relationship under the bus.

This is assuming that the British government doesn’t jeopardize peace in Northern Ireland as a result of the Internal Market Bill and Brexit.

Whatever happens, Britain is going it alone and will need a favorable trade agreement with the U.S.

According to the updates from the Biden-Johnson talk, a trade agreement will be hinged on respecting the Good Friday Agreement. Ahead of the Presidential Election, Democrats had delivered similar messages in the wake of the Internal Market Bill vote.

With the EU suing the UK over the Internal Market Bill and Biden’s clear message, the Brexiteers will need to tread carefully.

All eyes will be on the House of Commons, following the House of Lords voting down of the Bill.

For Britain, it would be a double blow should a no-deal Brexit also end any hopes of a U.S – UK trade agreement.

The Pound

At the time of writing, the Pound was up by just 0.01% to $1.32201.

Following a 0.38% pullback on Monday, stemming from Dollar demand, the Pound continues to stand its ground.

This is in spite of updates from the EU, where talks are not expected to deliver an agreement this week.

That leaves negotiators just a few days to iron out their differences and present an agreement at the EU Summit.

At some point, the markets will need to consider the worst-case scenario, however unlikely this may be.

Between now and next Thursday, therefore, convincing the Democrats that the Internal Market Bill does not risk jeopardizing peace in Northern Ireland seems key.

If the Democrats are convinced, then there is at least the fighting chance of a U.S – UK trade agreement.

It is somewhat ironic that the Biden administration is placing such emphasis on peace. In the years gone by, that special relationship has drawn British troops into a number of unwanted conflicts. Conflicts that the U.S has been a centerpiece in.

Perhaps we are entering a new era. One where the U.S looks to deliver peace through diplomatic channels. Such a future wouldn’t be a bad one for Britain that has worked hard to maintain that special relationship.

GBP/USD 12/11/20 Daily Chart

Brexit and U.S Politics – It Could Go Horribly Wrong for Boris and the Brexiteers

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The U.S Presidential Election looks to have delivered mixed results for Boris Johnson and the Brexiteers.

Just like across the U.S, the world awaits the outcome of the U.S Election.

Democrat Biden looks set to take the keys to the White House in the coming days or even weeks. That is assuming that a recount in Wyoming doesn’t cause a market shock. Trump would need to win Georgia, North Carolina, Pennsylvania, and either Wisconsin or Michigan to take a 2nd term.

Failure would make the incumbent the first U.S President since 1992 to lose a bid for a 2nd term.

While the global financial markets await the outcome of recounts and court decisions, the EU and Britain may also be keeping a close eye on proceedings.

That Special Relationship

Boris Johnson may be a little hot under the collar, with the Brexiteers likely to be strategizing in the event that Biden is in fact the victor.

The general consensus is that Biden is pro-EU and likely to take a hard line against the Brexiteers.

For the EU, this is critical in 11th-hour negotiations. Without Trump at the helm, there would be no threat of punitive tariffs in response to the EU’s strong-arming Britain.

This would also mean that a U.S – Britain trade agreement, which has been in the works, gets put on ice. It may even be put in deep freeze…

There is one saving grace from the U.S elections this week. Biden and the Democrats failed to deliver a Blue Wave.

Boris Johnson may have to ditch the Internal Market Bill to avoid ruffling Biden’s feathers from the get-go, however.

The EU will also take a much harder stance on the Withdrawal Bill that could leave Britain out in the cold if there is no compromise.

For the British government, allowing talks to drag out beyond the U.S Presidential Election may ultimately prove to be a grave error.

There are going to be few voters that will be willing to stomach any compromise with the EU. Imagine the EU enjoying unaltered access to UK fisheries. What a turnaround of events that would be.

Such an eventuality should bring an end to Boris Johnson’s political career. An end that he would not be able to come back from.

The Establishment

In Brussels, the EU Commission President will be eagerly anticipating a Joe Biden victory. Since the rise of populous governments across the EU, the threat of other member states departing continues to linger.

A Joe Biden victory would likely delay or bring to an end any near-term ambitions for the likes of Italy to go it alone.

Italy is not alone, there’s also Spain, Portugal, the Netherlands, and Austria. Much will depend on the next round of elections.

COVID-19 and the economic devastation across a number of EU member states have not helped. The unwillingness of certain EU member states to accommodate those more affected will be a sore point.

For voters across Italy and Spain, and beyond, there will be question marks over the benefits of being a part of the EU.

How Britain progresses in trade negotiations with the EU and beyond will certainly be watched closely.

Biden or Trump?

An EU friendly president will give the electorate and even the more left-wing governments some food for thought.

So, while the global equity markets have been on the move, another choppy 4-years could be on the horizon.

It will all hinge on the outcome of the 2020 U.S Presidential Election.

For the British PM, a rebellion in the ranks will be inevitable if both sides agree to uphold the withdrawal Agreement.

The Pound

At the time of writing, the Pound was up by 0.27% to $1.30195. The upward move came off the back of the BoE leaving interest rates unchanged earlier this morning.

In the days ahead, however, we can expect volatility to pick up.

The UK economy is under pressure as a result of the 2nd wave of the COVID-19 pandemic.

For this reason, the UK will need to avoid additional economic hurdles including a no-deal Brexit.

We should therefore see the Pound respond to any updates from the U.S Presidential Election. Once there is clarity on who will take the keys to the Oval Office, the markets can then begin to consider what lies ahead on the Brexit front.

If Boris Johnson were to take a page out of Trump’s book, calling an immediate end to negotiations would force the EU’s hand before any clarity from the U.S.

Such a move may be too big a gamble, however, as it would alienate a Biden Administration…

GBP/USD 05/11/20 Daily Chart

The BoE, Brexit, and COVID-19 Bring sub-$1.20 back into Focus

The latest

It really isn’t looking good for the Pound…

As the Brexit clock ticks on, the Pound continues its slide from 1st September’s high $1.34832.

At the start of the week, a realization that Brexit talks my end in deadlock kick-started the decline.

Talks resumed on Tuesday with fisheries the biggest hurdle and a trade agreement hanging in the balance. Chatter from both sides suggests that getting to the finishing line may be wishful thinking at best.

The EU wants Britain to keep British fishing in UK waters permanently low.

As we wrote on Monday, this is no longer just an issue of Brexit, but national identity. The EU and the British government must know that a concession on UK fisheries would be an end to any government, even the Tories.

The Withdrawal Agreement

Following negative chatter from the weekend, the latest is that the British Government plans to unveil an amended Withdrawal Bill.

The latest Bill has been tagged as the Internal Market Bill.

Some lawmakers have stated that the Bill is a necessity in order to avoid punitive tariffs on goods traveling to Northern Ireland from the rest of the UK. It is ultimately a stop-gap measure in case EU trade talks fail between now and departure day.

Others, however, have raised concerns over the UK breaching international laws that would have long-lasting damage on the UK’s reputation.

Bad News Comes in Threes…

The negative sentiment towards Brexit comes at a bad time for a UK government that is in the midst of a juggling act.

COVID-19 has returned with venom, forcing the government to reintroduce containment measures.

From 14th September, social gatherings of more than 6 will be banned. The move came as a result of a sudden jump in new COVID-19 cases. It is panic mode for a government looking to curb the latest wave ahead of the winter months.

While the government hopes to turn things around before Christmas, there is also an unknown from an economic perspective.

Alongside the negative Brexit chatter and fresh containment measures, there is also the BoE to consider.

The markets will be looking ahead to next week’s monetary policy decision. While the BoE may stand pat, there’s been enough negative chatter on the economic outlook to suggest a particularly dovish message.

Throw in the latest containment measures set to be enforced next week and it could be more dovish than initially thought.

The Pound

At the time of writing, the Pound was down by 0.55% to $1.29095. The pullback through the early part of the day leaves the Pound down by 3.44% for the current month.

Heavier losses are on the cards unless there is unexpected progress on the Brexit front.

A perfect storm would likely leave the Pound back at sub-$1.20 levels for the first time since March. Back in March, the Pound had hit a post-Brexit referendum low $1.14098.

GBP/USD 09/09/20 Daily Chart

Brexit Begins to Mean Again – A Real Threat of a No-Deal Hits the Pound

The Brexit latest

Brexit updates across the news wires from the weekend were as negative as usual. Numerous times, however, the Pound had remained resilient until this week.

We saw the Pound slide by 0.85% on Monday to leave it down by 1.53% for September and back into the red for 2020.

On Sunday, the news wires reported that the UK’s chief negotiator said that the government is not afraid of walking away.

The key issues facing both sides currently remain EU access to UK fisheries and the elusive trade agreement.

David Frost’s message from the weekend should not have been a surprise for the markets at the start of the week.

The messaging from Frost and the British PM has been consistent throughout. No deal may ultimately be the best outcome rather than be entangled in too many EU rules.

What’s next?

Brexit talks are set to resume today and the Brexit clock is ticking more loudly by the day.

We saw both sides agree to extend talks to the end of September in a bid to come up with an agreement.

The two sides are now entering the 8th round of formal negotiations. If the rhetoric is anything to go by, it may be the last round of negotiations before Frost and Johnson call it a day.

Both sides have aimed to have a deal in place in place by the end of the month. Any agreement would then have to be signed off by both sides before the end of the transition period.

It’s hardly surprising that talks will likely be difficult once more. After all, the EU is asking for UK access to its fishing waters to be kept permanently low.

For the EU, this appears to be a deal-breaker. If the UK government cedes to the EU’s demands, this would almost certainly be catastrophic. It would be hard to imagine a government giving up its fisheries when the electorate voted to be independent of the EU.

No more Softly Softly

David Frost’s interview came at a poignant time as both sides return to the Brexit table.

Some muscle flexing for sure but this time around it looks as though the markets have taken his threat as a credible one.

The British government may in fact walk away without a trade agreement. Perhaps more importantly, however, they will be seen as doing it for the right reasons.

It will have been for reasons such as this that Britain voted to leave.

The Pound

At the time of writing, the Pound was down by 0.18% to $1.31350. That’s quite a drop from the start of the month high $1.34832 that came off the back of Dollar weakness.

Expect updates from talks that resume today to have further influence. The Pound will remain on the defensive when considering the hurdles that lay in the way of an agreement.

Any negative chatter and we could see a return to sub-$1.30 levels before the end of the week. It could be even worse for the Pound should Britain walk away from the table, however.

GBP/USD 08/09/20 Daily Chart

Brexit – Will It Ever End? Yes and Soon, Hopefully.

Just a few months ago, British Prime Minister Boris Johnson vowed to talk away if a Brexit blueprint had not been in place by the end of June.

We are now in mid-August and to be completely frank, it just looks as though the Brits have made no progress since the drop-dead date.

So, the real question is why do the British PM and chief negotiator David Frost continue to hold talks?

There has to be one simple answer to this…

If “Little, once “Great” Britain continues to stand up against “The Establishment” it may give other EU member states a voice.

We have heard very little from the most likely member states to leave the EU. Well, the ones that were on the cusp of calling their very own referendums not too long ago.

As a reminder, these included Austria, Greece, Portugal, and Spain. Even the French were teetering. Had it not been for the French voting system Marine Le Pen would have definitely left a few of The Establishment red-faced.

Negotiating with the Establishment Democratic Style

Putting the political chaos of yesteryear aside, you only have to revisit the discussions on the COVID-19 Recovery Fund to get an idea of just how broken the EU actually is.

Member states such as Italy and Spain, who suffered the most from the pandemic, were on their knees.

The Frugal Four showed little interest in the needs of the most crippled economies that have a far greater contribution to the EU coffers.

Austria, Denmark, the Netherlands, and Sweden make up the Four.

By GDP, Italy ranked amongst the top 10 economies in the world, with Spain in the top 15.

From the Frugal Four, only the Netherlands managed to make it into the top 20 before the COVID-19 pandemic.

Surely, the economic powerhouses of the EU should have a greater voice than the minnows…

A voting system based on contributions to the EU coffers would make far more sense than 1 member one vote.

If the EU is to survive the COVID-19 pandemic and come out stronger, there will be no thanks given to the likes of the Netherlands.

I’m assuming that there are plenty of Austrian, Danish, Dutch, and Swedish citizens enjoying working throughout the EU.

I’m also guessing that each of the four nations would struggle with unemployment if all of their citizens returned home.

So, it really doesn’t come as a surprise that Britain voted to leave. It also didn’t come as a surprise that Brexiteer Johnson swept his way through the General Election.

As we move through August, the bigger question amidst the COVID-19 pandemic is whether there is any point in further talks.

If Britain walks away, the EU will claim victory. Well, until individual member states look to negotiate trade terms direction with Britain.

Can they even do that under the EU structure? Probably not.

The Future

If Britain makes some headway into bilateral trade agreements with the likes of the U.S, LatAm, Japan, China, and Australasia it may not matter.

A prosperous Britain answerable to no one but its own electorate would be quite an enticing alternative for the likes of Italy

We’re some way off elections across the “most at risk” EU member states. It gives Britain and the EU the time to get Brexit signed, sealed, and delivered.

For the Pound and the Brits, national identity and a return of national pride will undoubtedly be welcomed by most.

The EU will have to make it look like a loss for Britain. It would be a hard sell. Especially if the UK’s economic recovery gathers pace in the coming months.

As for Brexit negotiations, the new deadline for all agreements to be in place is the end of September.

When considering the lack of progress since June, it is hard to imagine that the complex issue surrounding UK fisheries can be resolved in less than 8-weeks.

Imagine the calamity in the UK, if the government yields to the demands of the EU on access to UK waters. That touches on the very reason for leaving the EU… Sovereignty!

I was somewhat amused to read of one of the main reasons behind the EU wanting access to UK fisheries.

Migration of fish from EU waters to UK waters due to global warming. The fish like the warmer waters of the UK.

Britain voted to leave the EU back in the summer of 2016. With the UK summers now reaching the dizzying heights of 37C, who needs sunny Spain.

At the time of writing, the Pound was up by 0.36% to $1.30793 for the day. While also up year-on-year, the Pound is still in the red year-to-date. At the end of last year, the Pound had stood at $1.3257.

GBP/USD 13/08/20 Daily Chart

If the recent performance of the Pound is anything to go by, there is more resilience in the Pound. Much of this, however, is based on the hope of an eventual agreement between the EU and the UK.

An end to negotiations without a trade agreement will be a test but it is unlikely to be the end.

We’re also unlikely to see parity against the Dollar. That is assuming that Britain can come up with a few trade agreements between now and December.

GBP/CAD Technical Analysis: Yesterday’s Low is Broken

Dear Traders,

The GBP/CAD is still bearish. The pair has broken yesterday’s lows before spiking higher. The GBP was bought early in the morning session.

We need to have in mind that the deadline for extending the Brexit transition period is on 30 June. This bounce is contributed to a sort of optimism but all GBP crosses have a headline risk now. At this point I still see the CAD stronger than GBP. Yesterday’s lows have been broken and the price is rejecting THU highs. We should expect a bearish continuation towards 1.6880.

The Analysis has been done with the CAMMACD.Core and Sit Systems

For a look at all of today’s economic events, check out our economic calendar.

 

2019 in a Nutshell and the Transit into a New Decade

If one is to describe the year 2019 in one word, we believe the word “uncertainty” would be the right fit. The world has entered 2019 with a high degree of uncertainty and is poised to finish the year with probably the same extent of uncertainties. The Global Economic Policy Uncertainty Index which is a GDP-weighted average of national EPU indices for 20 countries has remained in elevated levels in 2019.

Each national EPU index reflects the relative frequency of own-country newspaper articles that contain a trio of terms pertaining to the:

  • Economy (E)
  • Policy (P)
  • Uncertainty (U)

In simple words, the frequency at which newspapers cite “uncertainty” in relation to economic policy is high.

Source: Bloomberg Terminal

Sino-American Trade War

We have seen a de-escalation of trade tensions between the world’s two largest economies towards the end of the year. Investors grew hopeful that both countries will sign a partial trade deal. After weeks of speculations regarding the partial trade deal, “ a deal in principle” made headlines driving major US equity benchmarks to new highs. The optimistic statements in the US were not reciprocated to the same extent in China. It was a much muted and cautious response.

Any commitment and compliance from China remain murky.

The Trade Truce is being handed over to the financial markets like a Christmas gift. The real surprise will be unwrapping the gift and taking note of the details of the agreement. At the moment, vague promises and speculations are creating a “fragile” positive environment.

Uncertainties Persist! Phase One will ease but not eliminate uncertainties as Phase Two will handle challenging issues such as IT, Artificial Intelligence and cybersecurity and other hi-tech areas.

At CNBC’s Hadley Gamble at the Doha Forum, US Treasury Secretary Steven Mnuchin’s comments on Phase two was not inspiring:

“Phase Two maybe 2a, 2b, 2c, we’ll see….”

Populism and Globalisation

The growing prospect of populism comes with an array of uncertainties which is hard to ignore. President Trump’s presidency and Brexit are the bellwether of populism and have played a significant role in the recent volatility in the markets.

President Donald Trump

The Western political space is changing and is disrupting globalisation. The US President adopted a hard-line approach on not just trade, but also on migration and capital flows. The US has launched a trade war against major countries, some of which have been key allies of the US.

Brexit

Brexit Europe and the United Kingdom are practically on hold due to Brexit. The echoes of populism have threatened the existence of the bloc and have crippled its economy. Following the referendum for the UK to leave the European Union, the bloc’s members like Germany, Italy and France were also hit by several anti-establishment groups.

Hong Kong Protests

Hong Kong came to a standstill following months of democratic protests. The people of Hong Kong initially took to the streets to voice their frustrations on the extradition law. After the demonstrations intensified and turned violent, protesters laid five demands including an investigation into police brutality and the resignation of Chief Executive, Carrie Lam.

After more than six months of protests, economists are predicting a 1.3% contraction for 2019. The recent election resulted into an electoral win for pro-democracy parties which brought a semblance of normality after months of unrest.

Slowing Global Growth

Manufacturing Contraction

The manufacturing sector has been one of the main factors that had triggered concerns of a recession. In the US, the two widely- used indicators of the performance of the manufacturing industry are ISM and IHS Markit.

Both surveys consist of a diffusion that summarises whether the market conditions are expanding, staying the same, or contracting. Over the months, investors received mixed signals from both surveys. The divergence could partially be explained by the differences in the methodology used. Yet, the contrasting signals were noteworthy for investors.

As the year draws to an end, the preliminary Markit Manufacturing PMI figures for the US shows that it will be another month of steady growth fuelling hopes of a brighter start for 2020. On the other side, the ISM shows that the manufacturing industry has been softening for the past eight months and contracted for the fourth straight months at a faster rate.

Source: Institute for Supply Management

Interest Rates and Central Banks

Slowing global growth and recession fears have forced major central banks to cut interest rates to record lows. The Reserve Bank of New Zealand was among the first major central banker to commence a major easing cycle. After some resistance, the Fed and other central bankers has also cut their interest rates. The European Central Bank have even resumed the controversial quantitative easing to stimulate its economy.

Towards the end of the year, the concerns of slowing global growth have receded as global economic data has shown some signs that the downturn may be bottoming out. Central banks have paused the easing policies and appear less dovish when setting policies for 2020.

Stock Markets

A look at the performance of major global equity indices does not reflect the angst seen during the year. As of writing, the stock market is set to close the year on a strong note.

Two Digits Gains and Record Highs!

Chinese stocks have recovered strongly over the month. Despite a trade war, sanctions against public tech companies and slower economic growth, Chinese shares rallied. buoyed mainly by renewed optimism on the trade front.

Hong Kong Shares took a beating as months of protests have discouraged investment and compromised the country’s position as a financial hub. The US has also passed the bipartisan Hong Kong Human Rights and Democracy Act that could strip the city of its special trading status following annual reviews of its democratic freedoms. As of writing, the Hang Seng index was up by only 7%.

FTSE100 was primarily driven by Brexit-related events. Towards the end of the year, the index has been trading sideways, but the majority win by the Conservative Party has pushed UK stocks higher. However, the possibility of a hard-Brexit has tamed the rally.

World Equity Indices (% Change)

Source: Bloomberg Terminal

As the year comes to an end, we are seeing the dominant risks – trade and Brexit that have rattled the markets over the months moving in a positive direction.

Energy Sector

The energy landscape is changing over the increased concerns on climate change. The rise of renewables is altering the dynamics of the industry. The “Greta effect” and various extreme weather conditions are constant reminders that the climate crisis is not going away and governments will be forced to adjust policies to tackle climate change.

As we move into a new decade, we see that the energy sector has been left behind. Looking at the different sector of the S&P500, energy emerged as the worst performer.

The oil and gas industry is facing a supply glut and decreasing demand at the same time. Saudi Aramco’s IPO which is one of the biggest IPO was launched as a local affair reiterating the struggle to entice international investors at a time where the oil market is facing structural headwinds.

The deeper production cuts by the OPEC members and allies and less geopolitical tensions are currently supporting a fragile oil market.

2020 will be the confirmation of a new era…

Investors are navigating in an environment with historically high levels of policy uncertainty. As we step into a new decade, market participants will be familiar with:

  • A new world of higher tariffs
  • Peak globalisation
  • Climate change
  • A probable tech war between the US and China
  • Commodities gluts
  • Historically low levels of interest rates.

2020 is probably not the year for a recession. In the last two months, investors have priced-out the recessions risks. The optimism is mostly based on positive trade-related comments, central banks intervention and expectations of steady interest rate in 2020.

Still, Uncertainties Remain and 2020 could be as volatile as 2019!

Deepta Bolaky, Market Analyst at GO Markets.

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Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice.

Brexit the Day After – Are Brussels and Boris on a Collision Course?

Last week, Boris Johnson and his Conservatives cruised to a stunning election victory. British voters not only handed Johnson a comfortable majority in parliament, but also gave him the green light to take Britain out of the EU, after three and a half years of legal and political wrangling that has torn the U.K. apart and led to “Brexaustion” on the part of the public. With his new mandate, the U.K. is scheduled to depart the EU on January 31, with an 11-month transition period, in which the two sides are supposed to conclude a free-trade agreement.

On Sunday, Michael Gove, a senior cabinet minister in the Johnson government, insisted that the trade negotiations “will be concluded next year”. Prime Minister Johnson, who has displayed little patience with the EU, is also keen to wrap up trade talks with the Europeans as quickly as possible.

In Brussels, however, there is far less confidence that a comprehensive trade deal can be hammered out by December 2020. European Union officials are skeptical that 11 months is sufficient to implement a deal that will replace Britain’s 46-year membership in the single market, and believe that only a “bare-bones” free-trade deal will be in place at the end of the transition period. The president of the European Commission, Ursula von der Leyen, sounded a warning last week, stating that the “timeframe ahead of us is very challenging” and that the sides could face an “economic cliff edge” at the end of the transition period.

Since the stunning Brexit vote back in June 2016, there has been plenty of bad blood between London and Brussels, and the relationship may have worsened since Boris Johnson took over as prime minister. The Brexit saga will mercifully end on January 31, but the rancor and resentment between the U.K. and the EU are unlikely to disappear anytime soon. Brexit may be a done deal, but investors are likely to face further uncertainty and we could see volatility from the FTSE and the British pound, as the sides face off in the New Year to hammer out a new relationship in the post-Brexit era.

With Brexit Imminent, Irish Border Could Pose a Major Obstacle

The U.K. is a sea of blue on Friday, after Prime Minister Boris Johnson led his Conservative party to a decisive win in the snap British election. Early election results indicated the Tories had won 368 seats, a comfortable majority of the 650 seats in parliament. This is the biggest election victory for the Conservatives since the glory days of Margaret Thatcher.

In the end, Boris got the job done in brilliant fashion. As one political reporter noted on election night, years of infighting over Brexit had led to ‘Brexhaustion’, and an exasperated electorate gave two thumbs up to the Conservatives’ simple, yet effective slogan of “Get Brexit Done”. Still, it remains unclear what Brexit will look like when it’s “done”, although Johnson has promised to leave the European Union by January 31 and then negotiate a trade deal with the EU.

Aside from trade, there are thorny issues over which the two sides have been unable to reach a consensus. Perhaps the most formidable issue, which has blocked previous attempts to finalize Brexit, has been Ireland. Specifically, the issue in question is the border between Northern Ireland, which is part of the UK, and the Republic of Ireland, which is the only EU member to share a land border with the UK. When the UK was an integral part of the EU, there was a complete movement of goods and people between Ireland and the UK under single-market rules.

Now that the UK is leaving the EU, what type of border will take form between Ireland and Northern Ireland? There is tremendous resistance in Ireland (and the EU) to establish a “hard” border between Ireland and the North, as the two sides have lived in an uneasy, but peaceful relationship ever since the Good Friday Agreement, which ended decades of violence in Northern Ireland. The key to the agreement was complete freedom of movement between the North and Ireland, and there are fears that resurrecting a hard border with border inspections would ignite violence destroy the hard-won peace. At the same time, London and Brussels cannot simply allow goods and people to move freely between the EU and a non-EU country.

In October, the sides agreed to a deal in which Northern Ireland would remain part of the U.K’s custom territory and would also be the entry point into the EU’s single market. This means there will be no tariffs, quotas, or checks on rules of origin between Northern Ireland and the rest of the U.K. However, the North would have to apply certain EU rules, such as on agricultural products. Furthermore, the Northern Ireland assembly will vote in 2024 whether to continue this arrangement.

This is clearly a complex agreement, made more complicated by the fact that it requires the consent of three parties – the U.K., Northern Ireland and the Republic of Ireland. Given that there has been plenty of bad blood between London and Brussels since the Brexit vote in 2016, there could be plenty of hurdles ahead over the issue of the Irish border, even after Britain has sailed away from Europe.

Trouble at WTO Could Have Negative Impact on the U.K.

After the Election – Back to Brexit

With only one day until the British election, the focus of the markets is on Boris Johnson and Jeremy Corbyn as the two politicians duel in a vote which will have tremendous ramifications for the U.K. and for Europe. When the dust settles and the final votes are tallied, the attention of the markets will once again shift to the vexing issue of Brexit.

Fast forward to December. Prime Minister Boris Johnson has vowed to take Britain out of the EU by January 31. Assuming that Johnson wins his majority (by no means a certainty), a critical unanswered question is what will the trade relationship between Britain and the EU look like? London and Brussels are likely to have differing opinions on this question, which could lead to difficult negotiations. This could sour investor sentiment and weigh on the British pound and the FTSE. Both are sensitive to investors’ moods, and the vexing Brexit negotiations have caused significant volatility in the currency and equity markets.

Johnson’s position is that the UK and the EU will negotiate a trade agreement during an 11-month transition period, during which the UK will temporarily remain in the single market and the EU customs agreement.

WTO Rules Apply if No Trade Deal Reached

What happens if the trade talks are not wrapped up by then? Technically, both the EU and UK would be bound by WTO (World Trade Organization) rules, which would apply to any tariffs or quotas set by either side. However, as of December 11, the WTO court will be unable to adjudicate trade disputes, since the U.S. has blocked the appointment or reappointment of any judges, in effect leaving the court unable to function.

This means that if a UK-EU trade deal has not been reached after the 11-month transition period, neither party would have recourse to an enforceable settlement mechanism for trade disputes. If the Trump administration relents (or there is another U.S. president in office), the WTO court could be back in business. Still, this issue underscores the many challenges that trade negotiators will face after the day after Brexit.

Brexit Update – As Britain Gears up for 12th December, Where are we on Brexit?

The Latest

Since the EU approved Britain’s Brexit extension to 31st January 2020, Brexit has been put on ice.

For Juncker and EU member states, the call for a general election on 12th December gave some hope that Britain’s decision to leave the EU could be undone.

MPs failed to deliver on a democratic vote over a period of 3-years of political wrangling.

Not only did the EU Referendum cut short the political careers of two prime ministers but also delivered the keys of Number 10 to the Brexiteer of all Brexiteers.

As the UK General Election rapidly approaches, the chances of Britain’s departure from the EU remains elevated.

Not only has Boris Johnson managed to put back together a Tory Party disarray but has also gained support from the electorate. That is if the opinion polls are anything to go by…

Brexit Manifesto

With just 19 days remaining until the General Election, the Tories look set to finally deliver on Brexit.

Boris Johnson, with an anticipated parliamentary majority, is expected to reintroduce his Brexit deal to Parliament before Christmas.

Electoral Calculus predicts the Tories to gain 43 seats on 12th December, which would give a majority of 72 seats.

The Tories manifesto is Johnson’s Brexit deal, with Johnson stating that the agreement is oven-ready.

On immigration, Johnson is also looking to end freedom of movement for EU citizens. The Tories plan to bring into effect an Australian-style points-based system.

Immigration had been a key contributor to Britain’s decision to leave the EU and continues to drive support for populous governments.

So, while Labour Party leader Corbyn sits on the Brexit fence, the upcoming General Election is and has always been a 2nd Brexit vote.

Johnson will deliver should he win with the projected majority. Corbyn, however, would give voters yet another visit to polling stations to decide on Britain’s membership. A 2nd vote in favor of departing the EU would then result in an attempt to renegotiate an already approved Brexit deal.

More uncertainty for Britain, the economy, the EU and, more importantly, the electorate…

The Pound

The Pound fell by 0.49% to $1.2834 in the week ending 22nd November. Having found support from the opinion polls and predictors going into the week, the televised debate on Tuesday and Q&A with political party leaders on Friday contributed to the Pound’s pullback.

Volatility will continue to build in the run-up to Election Day. Expect Brexit chatter and heated televised debates to also focus primarily on Brexit.

What Lies Ahead?

As Election Day gets ever nearer, we can expect Brexit chatter to build. While Johnson will continue to beat the Brexit Drum, the opposition party and the SNP, the Liberal Democrats will attempt to drum up support from the Remainers. There’s also the fence-sitters to convince…

Live televised debates on Sky News on Thursday and Question Time on Friday will garner plenty of interest.

Voters will have an opportunity to digest views from each of the main political parties.

Brexit fatigue has and will likely continue to contribute to the Tory Party’s upside in the opinion polls.

The Election could deliver a different outcome, however. Theresa May discovered this the hard way in her snap election that led to a minority government and a Brexit standoff.

If Johnson fails to win with a majority, a hung parliament would hand the keys of Number 10 to Corbyn. The SNP has already been clear that they would side with Labour as long as Corbyn allows another Scottish Referendum.

It would certainly be a testy time for Britain. Voters would not only have to vote on membership with the EU. The Scots would also have to also decide on whether to go it alone…

We sat down with Michael Stark, an author with Exness, and asked his opinion on the political situation in the UK and how it could affect Brexit and the economy.

Why do the financial markets prefer a Johnson victory and an orderly departure from the EU?

Companies and, by extension, markets, like stability. Although any form of Brexit is certain to stunt economic growth over the next few years, no deal is clearly the worst possible outcome for the economy. Businesses in general can handle a worse outlook, but they usually can’t handle extended periods of uncertainty very well.

Big and small businesses across the UK are understandably very reluctant to make significant investments or hire many new employees when nobody knows what form Brexit is going to take. We’ve basically been in this situation for three years now, starting when no deal was first seriously considered as an option in late 2016.

Mr Johnson has a workable and reasonably popular deal that might stop the seemingly endless debate and allow the UK and its inhabitants to plan for the future with a degree of sureness. After such a long wait, this is what markets crave.

A Tory Party loss would suggest that voters are in favor of Britain remaining within the EU. Such an outcome should lead to a vote in favor of remaining in a 2nd referendum. Isn’t that a better outcome for the Pound and the UK economy?

Probably but not necessarily. The real question here is what would constitute a ‘loss’ and what would happen in such a situation. Jo Swinson has repeatedly ruled out a coalition with Labour. Equally a coalition between Labour and the Scottish National Party if the Conservatives lose is by no means guaranteed. For either of these to happen, though, there’d need to be a fairly big swing away from the Conservatives across most of the country; this isn’t looking likely.

As far as many voters are concerned, Labour’s policy on Brexit just isn’t realistic. The party would renegotiate Mr Johnson’s deal and put it to a public vote against remain. The problem is that Labour wouldn’t take a side and campaign until later, so their promise to ‘get Brexit sorted’ within six months if they won the election looks a lot like a pipe dream.

Markets have basically priced in a workable majority for the Conservatives next month. Anything else would probably mean a sharp drop for the pound in the short term. Ultimately, a majority for Labour (which almost certainly won’t happen) would indeed be a better outcome for the pound in the further future despite the prospect of even more instability in 2020.

Both the Tories and the opposition party have thrown in pledges in a bid to woo Brexit fence-sitters. On the face of it, whose proposed policies would be more favorable for the Pound, Brexit aside?

Most likely Labour’s, but that’s mainly because the Conservatives don’t really have many policies other than getting Brexit done. Policies in Labour’s manifesto aimed at boosting investment would probably be very positive for the pound if implemented. That last bit is key: a number of British economists, while praising Labour’s intentions, have questioned how practical they are.

Labour’s proposed hike to corporation tax would certainly be bad for shares, but the proceeds of this being used for investment could spur the pound upward, Brexit aside. More investment by government would mean more jobs, and more jobs would mean more spending, boosting Britain’s economy and giving fundamental support to the pound.

The big issue though is that nobody can really put Brexit aside now: this election is basically about Brexit. With the deadline currently 31st January, most other policies are sideshows. Tinkering with corporation tax and targeting investment better don’t matter much when a country’s about to leave the biggest trade bloc in the world.


Disclaimer

Opinions are personal to the author and do not reflect those of Exness.

Germany Narrowly Avoids a Technical Recession

Europe’s largest economy and the world’s fourth-largest economy narrowly avoids a technical recession. A recession arises after two consecutive quarters of economic decline. In the second quarter of 2019, the German’s economy had contracted by 0.1% compared to a growth of 0.4% in the first quarter.

Source: Statistisches Bundesamt Deutschland

The preliminary GDP data shows a slim 0.1% expansion in the third quarter. The final figures will be published this Friday and any unexpected downward revision will again trigger fears of a recession.

After a decade of economic expansion, some cooling off was expected. However, Germany is currently being hit by several headwinds:

  • US-China trade war
  • Brexit
  • A major shift in the Automobile industry

Trade wars and Brexit are geopolitical risks that are impacting the overall global growth. However, since the automotive industry is a key economic factor that contributes to the success of the country, car industry woes are probably the core domestic challenges that the German’s economy is facing.

The country is facing a deep turmoil in the automobile industry which is reshaping its economy.

Automotive Crisis

Climate Change, Self-driving cars and the changing needs of customers are the deep and fundamental challenges that are reshaping the automotive industry in Germany.

The switch to electric cars and rigid European regulations on carbon dioxide are causing a structural shift in the auto industry. The electromobility era has arrived to help halt climate change and we are seeing global sales of electric cars rising significantly.

Self-driving cars are becoming popular which has forced German carmakers and suppliers to embark on an unprecedented collaboration in exploring the industry of autonomous cars. In the face of fierce competition, German high-end carmakers- BMW and the maker of Mercedes-Benz have joined hands to tackle the expensive self-driving car industry and catch up with American and Chinese rivals. Yet, all German companies are still lagging behind their competitors.

Uber and other ridesharing companies have also caused a shift in demand. The auto industry is finding itself in the midst of tectonic shifts. Companies like Uber are not only a threat to taxi companies but also to car companies. In many western countries, consumers are weighing the cost-benefit relationship and are moving away from car ownership.

Germany’s Economy

The services sector and the jobs market are flaring up well in Germany. We have seen robust growth in the services sector in recent quarters. However, for the month of September, Germany’s Services PMI Index came at 51.2 which marks a 37-month low and fuelled fears that the crisis in the manufacturing sector has spilled over to the services sector.

Also, the industrial sector led by autos has seen a decline in activity. The Manufacturing sector remains deep in the contractionary level. Even though the Manufacturing PMI ticked up from 41.7 to 42.1 in October, it remains close to a decade-low.

The rate of decline has eased which is providing a glimpse of hope but the manufacturing sector remains in a recession and there are concerns that the slowdown will spread across other sectors of the economy.

Exports to the Rescue

German’s exports have surprised in September with a stronger-than-expected increase. Exports rose to 1.5% and provided some relief that Europe’s largest economy will avoid a recession in the third quarter.

Even though a technical recession has been avoided, the German’s economy remains in stagnation. In the face of the global trade war especially threats of crippling tariffs on German cars, a shift in consumer trends, rising number of factory job losses, a slowdown in the manufacturing industry and Brexit uncertainties, the German government need to rethink the export-led growth model to revive growth.

The German government has room in the fiscal space to counter slower economic growth. However, the government has strived for fiscal soundness over the years and have been reluctant to run a budget deficit despite concerns over a growth slowdown.

The final figures will be released on Friday. Investors will continue to monitor if there will be considerations for an increase in fiscal stimulus and whether the German’s government will abandon the zero-deficit policy.

Deepta Bolaky, Market Analyst at GO Markets.

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