It is very hard to set out on a journey if one does not know the destination.
Markets did largely as expected in the aftermath of the delivery of Prime Minister Theresa May’s letter to EU President Donald Tusk triggering the Brexit process although maybe as much by dint of them not knowing what to do next as from comfort that for the moment nothing much will change.
For clarity’s sake and so that everyone is on board as to what all the fuss is about, here is the link to the UK government’s website and to the full text, which is only 2,194 words long and is read in a few minutes.
There are two key issues that will be exercising the minds for the coming weeks. The first is the request by the British government that the separation agreements are hammered out at the same time as the future trade agreements are constructed. The EU’s stance on this point seems rational in that one cannot sensibly expect to enter into a civil partnership before one is divorced. Westminster, on the other hand, would prefer to sign both treaties on the same day and move seamlessly from one status to the other.
THIS ISN’T FLYING…
Both sides of the argument have their merits although I do, to be fair, favour the Westminster line. The rift between London and Brussels, and by association Paris, is that the British are famously pragmatic while the French, largely, put ideological orthodoxy at the beginning of every political decision. The celebrations to mark the 60th anniversary of the Treaty of Rome over the past weekend demonstrated this perfectly. The French, for six decades the main drivers of the idealistic dream, decide where they want to go and then take whatever route gets them there, irrespective. The British evaluate which is the best looking route and then wait to see where it takes them.
The Brexit referendum has done just that. The UK has embarked on a journey without a clear view of what the destination might be while the other 27 EU members meeting in Malta this weekend will begin the process of defining what their end game is before the negotiations can begin. Jean-Claude Juncker, the muppet-in-chief and never one to learn from his mistakes, continues to mouth off blissfully unaware that it was in all probability and to a significant part his flagrant arrogance that swayed the referendum against British membership of the EU.
If anybody were to make a two-way market on the divorce being anywhere near completed by March 29 2019, I’d sell the living day lights out of it, then sell it on the follow and then sell it again.
There is much discussion in the media as to whether the prime minister was trying to blackmail the EU with her repeated mentions of security. If putting your best foot forward is blackmail, then she has. If pointing out that your security services are the leading light in a joint effort and that a bit of give and take is required from both sides, then it is not.
An explanation as to why such a fuss is being made over how often she mentioned trade and how often she mentioned security might be found in the observations of one of the commodity houses. “If you read, watch or listen to the news here you quickly realise none of the press voted to leave hence it seems 95% of the commentary of the Brexit process is doom-and-gloom about the decision and the coming two-year negotiation period to complete the process,” it said in its daily market report.
So while we were filling our day musing over the merits and demerits of Brexit, the pound, Gilts and UK equities did nothing they might not have done on any other given sunny Wednesday in March. In fact most asset markets were strikingly calm into the final trading session for settlement in Q1.
…THIS IS FALLING WITH STYLE!
Meanwhile, the US rate debate rumbles on. Both John Williams of the San Francisco Fed and his opposite number from Boston, Eric Rosengren, have mentioned the unmentionable,, which is the figure “four” in the context of the number of possible rate rises for this year. I’m not sure where the assumption was born that the Fed only moves in quarter points because it is not the number of tightening moves that count but the aggregate tightening. That said, the Fed does not want risk scaring the markets and a single half-point move could easily launch a sharp sell-off for which it would be severely castigated.
No more than half a generation ago central bankers were still maintaining that they were here to steer the economy and not assert markets. I clearly recall the good old Bundesbank somewhat confusingly declaring that it was not the role of markets to try to second guess its monetary policy intentions.
When all is said and done, oil remains a good indicator of underlying sentiment and its rally back from recent lows should not be missed. WTI got as high as US$49.75 per barrel in overnight trade and it could, given the positive price momentum, break back above US$50/bbl during today’s session. Cash copper has also picked up again in LME trading after a period of relative weakness. Look for it to take another run at US$6,000/tonne.
All is not doom and gloom although there is still so much doubt about the sustainability of the recovery. This does not feel like a time to be making any major portfolio decisions so “steady as she goes” is most likely still the wisest near-horizon policy.