“Nayes to the Left” – Brexit Story Far From Clear

Theresa May survived no-confidence vote but MPs rejected her Brexit Withdrawal Agreement so UK PM is now to hold cross-party talks in order to bring new Brexit deal. Nevertheless, it seems that Brexit story is all but clear and all scenarios seem possible. Meanwhile, Destatis published its first estimate on German GDP in 2018, showing that Germany avoided technical recession. However, one should wait for the full data on Q4.

‘Meaningful vote’ held in UK’s House of Commons on Tuesday evening ended up as not so meaningful after all, with MPs rejecting the Withdrawal Agreement with a historically wide margin of votes (432 nays, 202 yeas). Following the 230-seat margin of defeat, leader of the opposition Jeremy Corbyn forced a no-confidence vote that also failed yesterday, meaning that Theresa May could start with cross-party talks on a new deal that should be negotiated with the EU all over again.

It is worth mentioning that regardless of yesterday’s no-confidence vote, out of May’s 317 members of the parliament, only 196 backed the deal, pointing out that snap election might be around the corner (the last one was held in spring 2017 and ended up with a hung parliament).

The story that began in the first days of summer of 2016 is still unravelling and could easily be continued beyond March 29th to July or even beyond in case UK government requests an extension and Berlaymont approves. Analysts still predict that soft Brexit is the most likely scenario while probability of UK remaining in EU in case of second referendum seems more likely than hard Brexit. However, there’s still a long path in front of UK government and every scenario looks possible: extension of Article 50, new elections, soft and hard Brexit.

While most of the investors’ focus was on UK, German Statistical Office published its preliminary estimate of GDP for 2018 this week and it seems that German economy narrowly avoided a technical recession last year as GDP increased by 1.5% YoY. In case first three quarters of 2018 won’t be revised, 1.5% growth means that in terms of QoQ, GDP in Q4 increased slightly above zero. However, one should bear in mind that these are still preliminary estimates, so we should wait until February 14th when Q4 data will be published. Looking at the drivers of the deceleration in 2018, household consumption takes the blame, as it grew by 1.0% compared to 1.8% in 2017 while net exports decreased by 0.2% versus 2017.

Looking at the cable exchange rate, it seems that Withdrawal Agreement vote eased some of the fears of investors (the reason why is arguable). However, unclear Brexit story and apparent economic slowdown in Germany (which might trickle down to the rest of the EU countries) forced investors into safer assets such as German Bund. This week we have seen EUR 10Y benchmark once again dipping below 0.20% handle, the level last recorded in April 2017; and that was when the ECB was still buying sovereign and corporate bonds.

The chart submitted demonstrates how the CEE EUR-denominated international bonds caught a bid in the last few weeks, with risk premiums tightening at a modest pace. The move was also influenced by dovish comments from central bankers, as well as low core yields pushing yield thirsty investors to the periphery.

Marin Onorato, CFA
Category : Blog

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