Brexit - another week another vote, but....

PM May is in front of Parliament yet again, again, Tuesday evening with her "no-plan". The never ending Saga of Brexit enters its final phase (or not)

 

BBC Political Editor Laura Kuenssberg calls the chances of Parliament approving Mrs May deal "very remote" – this will unleash a number of votes which the BBC has been kind enough to outline for us below:

 

 

 

 

 

I have since last year believed the only tangible solution to be An extension of Article 50, simply because nor the voters not the Parliament seems to know what the Brexit actually was about? Leaving the EU with or without custom union, Northern Ireland issue with borders to Ireland, and overall a split inside not only the government but also the opposition on where and what they wanted on EU.

 

There has also been a big disappointment from voters: Parliament continues to excuse their actions by "respecting the vote of the people" – Hallo!!!  The voters elect a Parliament for them to do the hard part, by definition is falls on Parliament to represent but also enact a plan/strategy. There is a political crisis in the UK – not only in the Tory Party but across all parties. This weekend polls in Northern Ireland shows the DUP is not representing its voters:  Northern Ireland voters want a soft Brexit:

 

• A significant majority, 67 percent, support a Brexit in which the United Kingdom stays in the EU's single market and customs union, so avoiding the need for checks anywhere, the Irish Times/Ipsos MRBI poll showed.
• Almost 60 percent say they want a special arrangement for Northern Ireland for no checks on the border, even if that meant some checks on goods traveling between Great Britain and its province of Northern Ireland.

 

We see the most likely sequence of event being:

 

March 12^th:  Fail

March 13^th: Fail

March 14^th: Pass…

 

Meaning PM will have to ask EU for an extension of Article 50 of the Treaty. This however is not an easy job: This link is very useful: Article 50 extension – The Institute for Government -

 

It has to be accepted uninamously by all EU members and many countries led by France would like to know what the UK will use the extra time for? The hope is a Second referendum, but… furthermore buying more time also clash with European Parlimentary Elections in May – and as The Institute of Gvoernment point out:

 

The length of any Article 50 extension would ultimately be determined through negotiation between the UK and the EU. It would depend on how much was left to do – whether it was just ratification or renegotiation – and the EU's willingness to overcome some of the big obstacles. In particular, it would have to factor in the European parliamentary timetable:

·         May 2019: European Parliament elections

·         July 2019: new MEPs take their seats

·         Autumn 2019: the new European Commission faces appointment hearings in the European Parliament.

As such, four time slots have been suggested: 18 April 2019, 23 May 2019, 2 July 2019 or beyond.

Which all of them is very complicated matters.

 

RISK ASSESMENT:

 

• Hard-Brexit 25% chance
• Extension 70% chance
• PM May deal 5%

 

Hard Brexit comes with a 5-8% drop in GBP and a 5% drop in equity (based on major event risk since 9-11)

Extension however is not  a positive as it may sound here is why:

 

Delaying of course avoids hard-Brexit but as we have constantly said on GBP and UK economy, our biggest concern for 2019 is not Brexit (also because we gave high probability to an extension) but the economic deteriation of credit. We see Bank of England behind on rates and the CREDIT IMPULSE for UK remains one of the weakest in not only Europe but also G-20:

 

Saxo Bank: UK Household credit impulse drops to near two-year low

 

The only thing keeping the UK going in growth is the retail spending which should and will be impacted by an extension.

 

 

 

 

 

 

Source: ICG – Economic and Investment Research – Global Macro and Market Views Q1-2019

 

 

Conclusion

 

We are concerned – very concerned about the patient UK – macro data will continue to underperform, in particular the credit facilitation which indicates a summer of contraction (Credit Impulse leads by 6-9 month the growth cycle)

 

• Foreign Exchange: Underweight – see potential for 1.2000 in GBPUSD
• Fixed Income – Underweight, but Bank of England will start cutting rates by Q4 – (probability by consensus is less than 18% chance – we see it as 70% likely)
• Equity – Neutral – Companies are flexible and able to weather storms, but investment will continue to fall.

 

Let's hope this will follow the great "forecaster and economist" Mick Jagger of the Rolling Stones:

 

You can't always get what you want
But if you try sometime you find
You get what you need

 

Safe travels,

 

Steen Jakobsen

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

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