The Weekly: Ding Dong Merrily on High

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10/12/2018
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According to the Disciplinary and Penal Powers of the House, MPs that find themselves in contempt of Parliament can be detained in the Clock Tower.  However, the last time this was used was in 1880, and unfortunately, the House no longer has the right to imprison MPs – instead this is left to the Metropolitan Police on the Parliamentary estate.  We were as disappointed as everyone else when we discovered that MPs can no longer be held in the Clock Tower. Although currently undergoing repair, I am sure the noise from Big Ben would ring some sense into some of them!

So, the UK Government found itself in contempt last week. Like most people at the time we had no idea what this meant, but what it did do is force the government’s hand in revealing the full legal guidance of the Brexit deal struck by Theresa May. Both pro-Brexit and pro-Remain MPs wanted to see the full legal guidance to the backstop, probably the only thing both sides have agreed on since June 2016. Unsurprisingly it was exactly what we all thought, so we don’t understand why the government didn’t publish it in the first place, thus avoiding finding itself in contempt with egg on its face.

The legal advice said that both sides agreed the backstop should only be used in a last resort – i.e. if no agreement over Northern Ireland can be reached and no trade deal can be agreed upon. However, the legal guidance did confirm that if both sides find themselves in a backstop agreement there would be no legal basis for either side to leave without finding a solution. Given that there is absolutely no incentive for the EU to find a solution, then this could result in the UK being subject to all the rules of the EU without having any power or say.

No news here then, this is something many politicians including Boris Johnson had been saying for weeks. The backstop agreement is hated by most of the backbenchers, both by those who want to remain in the EU, and by those that want to leave.

This does present the UK with a constitutional crisis, as by having a backstop  MPs would not be delivering on  the referendum result, although many of them in defence would argue that the people who voted for Brexit do not want the deal that Theresa May is trying to push through. This is of course true with several prominent financial backers of Brexit over the weekend confirming that they would rather stay in the EU than accept Theresa May’s deal. 

Therefore, Theresa May has suspended the vote on Tuesday. For the vote to pass she needs to get more concessions from the EU. However, given the news coming out of Brussels we do not think that is likely. The European Court of Justice has confirmed Brexit can be unilaterally cancelled! Previously it was thought that once article 50 had been triggered it was irrevocable, that is unless it had the permission of every other EU member state to revoke article 50. The EU can see how divided the UK is and they see an opportunity to indirectly influence the outcome. The EU would of course like to see the UK remain within the bloc so why give concessions that would see it leave? The timing of the ECJ ruling is also hardly a coincidence.  When this news is combined with Theresa May’s unwinnable deal, it does look increasingly likely that the UK is not going to leave the EU in March 2019. After all, what options are left?

Jeremy Corbyn believes that Labour should have the opportunity to take power, and thus have the opportunity to negotiate their own withdrawal from the EU. No doubt this would further extend the Brexit process and uncertainty. This is unlikely as the EU do not care who they deal with. It is also not lost on Jeremy Corbyn that most of his fanbase support the UK staying within the EU. It will only be a matter of time before Labour promises a second referendum vote on Brexit in any snap election; something that is looking increasingly likely given the limited options that remain. So what options are there?

The Tories may think that tomorrow’s vote is suspended, but given the reluctance from the EU to give concessions, in reality it leaves the UK with two options. The first is a hard Brexit from the EU. The second is staying within the European Union, however, both need to be agreed by the populous at large. Simply ignoring the result of the last referendum sets a dangerous precedent. If we’re not careful the biggest loser will be democracy, and that will be a tragic outcome. If the government ignores the 2016 vote, then the scenes seen in Paris over the last few weeks could be replicated here. A political elite disconnected from the voters may lead both Brexiteers and Remainers to agree on one thing:

Ding Dong, we need a bigger clock tower!

Does this turmoil present an investment opportunity? Ongoing Brexit uncertainty means investors should still be cautious, but given the recent falls in the UK stock market there are always opportunities. For example, the FTSE 100 - at the time of writing – has over thirty stocks with a dividend yield of over 5%. Of course, the dividend yield takes a historical look at what dividends have been paid out over the last year when compared to their current price. However, while it’s not a perfect indication, we do believe it illustrates that fundamentals are always the most important catalyst over the long term. It is extremely frustrating that continual Brexit uncertainties continue to dominate markets like they do.

The FTSE 100 also suffered its biggest fall in two years last week. This was in part due to the escalating tensions between the United States and China. At the start of last week, it seemed like there had been an easing of trade tensions between Donald Trump and Xi Jinping at the G20, but this was short lived with the arrest of, Meng Wanzhou, the Chief Financial Officer of Huawei, a company which is one of the largest telecommunication companies in the world. The arrest took place in Canada on the instructions of the US. The alleged crime is Huawei breaking US sanctions in Iran. Investors could well be in for a bumpy ride globally given the sphere of influence of both the US and China.

Equities Slide Continues As US Yield Curve Briefly Inverts

Global equity markets were firmly in reverse last week as a section of the US yield curve briefly inverted. In normal conditions, longer dated bonds typically yield more than those at the shorter end, however, the yield on the 5-year US Treasury slipped slightly below that on the 2-year which sparked a rapid sell-off in US equities that spread around the globe. 

Whilst inverted yield curves are often viewed as a signal that a recession is looming, this can take numerous quarters or even a couple of years to come to fruition and the US economy does appear to be on firm footing based on recent data. Despite this, investors are in a cautious and punishing mood at the minute and the arrest of the CFO of Chinese telecoms giant Huawei in Canada also spooked the market on fears that it could lead to heightened tensions between the US and China.

It was therefore a dismal week for the world’s major indices with all of them ending the week heavily in the red. The S&P500 was the hardest hit, falling by -4.6% in what was a shortened week of US trading due a national day of mourning following the death of former President George H.W. Bush. Closer to home, the FTSE100 declined by -2.9% whilst in Europe, German equities entered bear market territory following a -4.2% fall in the DAX30. In Asia, the Nikkei 225 was -3.0% lower.

The other big news from last week came from the oil market after OPEC and its oil producing allies agreed to slash production in an attempt to prop up prices. 1.2m barrels of oil per day will be cut from global markets with OPEC reducing its production by 800,000 although Iran, Venezuela and Libya are exempt from the cuts. Unsurprisingly, prices rallied on the back of the announcement with Brent concluding the week just over +5.0% higher at $61.67 a barrel. Elsewhere in the commodity sector, gold maintained its recent ascent as it benefited from a bit of weakness in the US Dollar. It rose by +2.2% to $1,246 an ounce.

The Week Ahead

UK investors might have to wait on further Brexit developments now that Tuesday’s parliamentary vote on the Prime Minister’s proposed Brexit terms looks set to be cancelled. Speculation over the weekend suggested the vote could be delayed as the likelihood that May would get sufficient backing grew increasingly unlikely.  In terms of economic data, the latest UK employment numbers are also due on Tuesday – the unemployment rate is forecast to remain at 4.1% with wage growth also set to be unchanged at 3.0%.

Overseas, the European Central Bank meets on Thursday to hold its final policy meeting of the year which is expected to formally bring its unprecedented €2.6 trillion stimulus scheme to an end. However, with the economy appearing less robust and trade tensions adding to concerns, Mario Draghi’s comments will be carefully analysed.  In the US, the latest inflation data is scheduled for Wednesday in the form of updated Consumer Price Index numbers, whilst Retail Sales figures on Friday will help to gauge the strength of consumer spending.