We don’t have a crystal ball at Labarde Management, but we have a funny feeling that January 2020 is going to look a lot like January 2019 – “Brexit, Trump and China”.
Last things first
Just breaking as we press send on this email is progress on the latter of these, with the Chinese Vice Commerce Minister announcing to a press conference that Beijing and the US have agreed on the first phase of a trade deal following major progress in negotiations. As part of this, the Minister announced that the US will follow up on its promise to cancel tariffs on a phased basis.
We will follow up with more details of this development, but for now let’s look at the Brexit bit.
For one thing, if you thought that yesterday’s huge election win from the Conservative Party means that we’re going to start seeing the pound become data-driven once again, think again. The UK General Election was just a brief intermission before the political landscape once again becomes dominated by talk of Withdrawal Agreement and Implementation Bills, deals, and all things Brexit-related.
A very different Brexit
However, while the headline focus is going to be the same, the approach is going to be different. For one, Theresa May was necessarily reliant on support from everybody from the wettest of Europhiles within her own party to the staunchest of Brexiteers within the Northern Irish Democratic Unionist Party with whom she had formed a confidence and supply agreement in order to form a government. Boris Johnson is now in a very different position than his predecessor. With a 79 seat majority he is in a position to get the votes through parliament that both May and Johnson himself had failed to do in previous terms.
Twitter is not the real world, pt. 3,892,477
Those with less control over their emotions on Twitter dot com may have been warning of the dangers of a so-called “Hard Brexit” now that Boris Johnson has been elected on an unequivocal platform of “Get Brexit Done”, the likelihood is that we are going to have a much more moderate approach to Brexit than would have been the case had any of the previous deals squeaked through parliament. With such a strong majority, Boris will no longer be beholden to either the DUP or to the purist Eurosceptics within his own party. He is also no longer fighting for his political life – thanks to the Fixed Term Parliament Act he has five years ahead of him.
While the Withdrawal Agreement of November may be toast (and feels a very long time ago right now), it is still worth looking to the Bank of England’s Monetary Policy Committee’s report to gain a grasp of where the central bank will see the UK economy, and subsequently its attitude to rate policy:
“The Brexit uncertainties that have been facing households, businesses and financial markets are assumed to decline gradually over the forecast period, leading to a pickup in household and especially business spending. The progress of the Withdrawal Agreement and the extension of the UK’s EU membership are likely to remove some uncertainty and support confidence in the near term, partly driven by a reduction in the risk of a no-deal Brexit. Some uncertainty is likely to persist, however, as the details of the UK and EU’s eventual relationship are assumed to emerge only gradually over time and the smoothness of the transition to it remains to be determined.”
The MPC added that: “Underlying UK demand growth remains a little below potential in the near term, but picks up during 2020 as the dampening effects from Brexit-related uncertainties begin to dissipate. That boosts business investment growth in particular. The pickup in GDP growth is also supported by easier fiscal policy and the gradual recovery in global growth.”
So where does this leave sterling?
With the Conservative majority (or, in this instance rather more relevant, the failure of Marxist leader Jeremy Corbyn to take power) sterling predictably rallied hard.
GBP jumped more than three cents to USD1.35 – hitting its highest level since May 2018 and its biggest one-day rally since 2017. Sterling also rallied hard against the single currency to EUR1.20.
We don’t want to be those guys, but we have been consistently bullish on GBP and see no reason not to continue to expect long-term sterling strength. That being said, there remains short-term risk. The Conservatives may have a big majority, but never underestimate their capacity for infighting, even when in a position of strength. Secondly, the UK is only one half of the deal. The next hurdle will be the agreement of the remaining European Union member states in order for the United Kingdom to finally move beyond Brexit. – something that is far from a foregone conclusion.
Once we start to get a clearer picture of the timetable for Brexit, we will then see a return of data-dependency for GBP with Bank of England monetary policy back in the frame. While there was a lot of rumour about a rate cut following the dissent of two voting members at its last meeting, we think that a rate hike and with it a progression into a longer-term hawkish cycle is a more likely next move than what would amount to a short-termist cut from Threadneedle Street.
As a post-script, apologies for all of our attention directed towards the YouGov MRP model in our pre-election email. It turned out to be a bit useless, didn't it?
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