Dinner on Wednesday headlines “Cabinet backs Brexit deal”, by breakfast two ministers had resigned, including the Brexit negotiator, as Theresa May battles to find support for her Brexit proposal and facing a very hostile parliament. The biggest worry is that the deal allows Brussels to retain a de facto veto over whether Britain can ever leave the customs union. Therefore, whether we will ever be able to pass our own laws, or negotiate our own trade deals? One of the main reasons for Brexit.
We need to look at this from an investment point of view and try to decide what the consequences might be. The pound fell sharply, domestic stocks were hit hard on the news of the resignations. Not really a surprise. Investors ran for gilts, which is a reaction to concerns that we will now leave the EU without a deal, which will, in turn, lead to an economic downturn. The rally in gilts may be short-lived if we head to a General Election and a Corbyn led government. What are we getting exactly for our 40 billion dollars?
Europe continues to have problems of its own, aside from Brexit, as the Italian Government wants to press ahead with its budget proposals, to stimulate an economy that is struggling. It was reported this week that the German economy shrank in the third quarter by 0.2%, despite all the monetary stimulus and benefit from the euro. Ambrose Evans-Pritchard in Thursdays Telegraph explains why he believes that a no deal would hurl the eurozone into an “existential crisis”.
If the risks of a no deal, not only for the UK economy but for the rest of Europe are severe, one will think there must be implications for the global economy? The ECB is nearly maxed out on what they can do further to stimulate the domestic economy. The Federal Reserve may have to revise its desire to raise interest rates.
Investors have focussed on several topics that could cause the next recession. US interest being one, trade wars another, maybe a rising oil price above 100 dollars, and levels of corporate debt. This was at least reported in the most recent Merrill Lynch Fund manager survey. Not sure where Brexit featured, but not highly. Take the same survey today one would that it will have leapt up the table, as investors have a habit of focussing on what makes news headlines on the day. As much as the rest of the world has seen Brexit as a domestic issue, it may start to focus on the wider implications.