From Bad To Wurst
Submitted by Michael Every of Rabobank
Most people looking at markets right now would tell you that most markets right now are looking pretty bad. Yes, there are a few happy-clappy hold-outs both in terms of markets and people, and the latter include some central bankers. But what else can you say when the 10-year US Treasury yield is at 2.34% and the US curve further inverted? When the market is pricing in a huge chance of a Fed rate cut THIS year? When despite that fact vulnerable EM currencies are tumbling (which, by the way the Daily had flagged as a threat repeatedly – if the US is going down we are ALL going down, and the US is going to land on EM, not EM on the US): e.g., USD/BRL is heading for 4 again, and TRY has only stopped tumbling due to overnight swap rates surging past 1,300%.
And let’s not forget in Europe we’ve just seen Germany issue debt at a negative yield again for the first time since autumn 2016 AND 10-year Bund yields drop below their Japanese equivalent as Eurozone 5Y-5Y forward inflation collapses. Weren’t the ECB talking about a rate hike just weeks ago?! Mixing in the bigger picture, that’s on top of a Europe unable to agree a common stance on China or Huawei, and where yesterday saw a Wall Street Journal op-ed arguing that NATO is likely finished.
China itself is somehow still expected to get us all of this mess again, and over there industrial profits collapsed y/y. Even allowing for the timing of the Lunar New Year that does not bode well for either the economy or the over-heated stock market. Perhaps they need to build another 10-20 million empty new homes to kick the can down the road? And while the US is sending Mnuchin and Lighthizer to talk trade in Beijing this week, it is also talking about selling F-16s to Taiwan, leaning closer to Taipei, sailing ships through the Taiwan strait, hosting persecuted Uighurs at the State Department, and forcing a Chinese firm to divest from one particular US app – Grindr. (Chinese ownership of that has certainly stayed in the closet to the general public.)
Yet if you think all this is bad, yesterday’s UK Parliamentary action was far, far worse. It is often said that if you want to enjoy both sausages and law, you should never see how either is made. Well we just saw the wurst-making process in full effect. The key thing to take away from the latest debacle is that Parliament, after telling the indecisive and split Tory government to grow up and deal with Brexit like adults, showed it too is indecisive and split. In a series of indicative votes that had been flagged by the Bremain press as likely to provide a breakthrough, each and every alternative to PM May’s withdrawal deal, already rejected by historic margins twice, was….rejected! Parliament won’t back No Deal (For 160 – Against 400); or EFTA (188-231); or EFTA and the EEA (65-377); or a Customs Union (264-272); or a Customs Union and alignment with the single market (237-307); or revoking Article 50 (184-293); or a second referendum (268-295); or even contingent preferential arrangements for no deal (139-422). The same farce may happen all over again on Monday if the schedule stays the way it is.
Before then, and adding a chunk of chewy gristle into this particular sausage, Speaker Bercow also made very clear yet again that he does not intend to allow a third vote on May’s deal to come to Parliament without substantial changes. The government still seems to be ignoring that ruling and muttering about giving it one more go by some technical means this week. Yet the DUP are adamant they will not back it even if that does happen, in which case too many Brexiteers are likely to side with them, and the deal will be shot down again. That is even though May has now offered her resignation if the deal does go through – prompting Boris “Moses” Johnson to suddenly back it…talk about sausages! Yet it seems that May is now finished either way, with The Guardian bewailing that although she is the worst PM in living memory, and maybe longer, the prospects are of a hard-line Brexit leadership replacing her in both regards.
As ITV’s Daniel Hewitt states: “Unless DUP come on board we’re surely heading for a really long delay to Brexit. MPs will vote down May’s deal, then pick an alternative which she won’t implement, she’ll resign and EU will give us a long extension while Tories elect a new leader and possibly a general election.” And also the UK taking part in the EU Parliamentary election in May, in that case, which will introduce a UK-sized chunk of indigestible gristle into the EU body politic.
Like I said, from bad to wurst.