"Those are my principles, and if you don't like them I have others" Groucho Marks

Brexit rumbles on, European leaders must be thinking, as we seemed mired in confusion and chaos, that they are looking like achieving what they set out to, which was ultimately prevent Brexit. The events of the past weeks in parliament A look ever more likely to either create a delay to the 29th of March or another referendum. Theresa May expressed concern that another referendum could cause social unrest, and this could well be the consequence, whatever the outcome. At present odds on another referendum remain against, according to the bookmakers. However, the odds remain in favour of a General Election in 2019.

An interesting aside, Citi analysts forecast German 10-year bund yields to head back into negative territory. Should that occur, it must send a strong signal of the level of fear held for the outlook into the broader eurozone economy. Any investor buying into German bunds on a ten-year negative yield does have to paste in a very bleak outlook for that economy. In our opinion, should yields head back below this mark, someone somewhere must believe the current structure of the euro will not continue, and some form of a reintroduction of domestic currencies running in parallel with the euro cannot be ruled out.

Moving on to the global economy and stock markets, China announced its latest GDP data on Monday. The Chinese economy grew at 6.6% in 2018 and at 6.4% in the three months to December compared to a year earlier. The 2018 figure was its slowest annual growth rate since 1990, and the year on year rate was below the 6.5pct achieved in the third quarter. This adding to concerns that the Chinese economy is slowing further. Chinese authorities have a delicate balancing act, on the one hand, they want to reign in irresponsible borrowing, on the other not risking a sharp slowdown to the economy. A dilemma most central bankers face and particularly the one the Fed is struggling with at present as well.

The IMF made headlines overnight as they lowered growth forecasts for the global economy by 0.2 and 0.1 pct for 2019 and 2020 respectively. They now forecast the global economy to grow at 3.5% this year and 3.6% next. As has the equity market reacted to a slower growth outlook, the economic consensus for this year has now lowered forecasts to just below 3%, appearing to respond more quickly to the data than the IMF. The modest downgrade suggests the IMF seem to remain remarkably upbeat about the outlook for the global economy, at least compared to others. Sadly, their track record in forecasting is not a good one. Ultimately the primary driver of capital flows may be how the Fed reacts in the coming months.  

Posted on January 22, 2019 .