Taking the pulse of Brexit
BlackRock Investment Institute – the UK election
“We see the UK entering a period of relative political stability for the first time in a decade. Johnson has political authority and flexibility but faces another difficult Brexit deadline: to negotiate a trade deal with the EU by the end of 2020 when the current Withdrawal Agreement expires. This is a tight timeframe that Johnson has said he sees no reason to extend, with end-2020 serving as another cliff edge leading to a disorderly exit on World Trade Organisation (WTO) terms if no deal is in place. We see this as a risk but not our main scenario.”
“Negotiating a trade deal will be difficult and could take many months to play out. Uncertainty could spill over into the second half of next year. Yet if more time is needed to strike a deal, we expect Johnson to find a way of extending the deadline – at least for ratification. A larger parliamentary majority will likely give him a freer hand to negotiate with the EU and make some concessions without materially changing what will be a relatively hard Brexit – leaving the single market and customs union. That should benefit UK goods more than services. The result in Scotland will be a source of tension and up pressure for an independence referendum, but we don’t expect this government to grant one.”
What we think
Emerging markets – Andrew Swan, Head of Asian Equities, on the impact of the trade war on Asian earnings
“We talk about a trade war, but at the highest level, it is populism. That’s what trade wars are – it is a protectionist, nationalistic move. More specifically on trade, it has been a topsy-turvy year – will they deal, will they not? - with some very large personalities involved in the US/China relationship. In many ways, it looks increasingly difficult that a deal can be done given the sovereignty issues for China in particular, but also the US.”
“On earnings, I do believe that the uncertainty on tariffs has impacted demand in the region, particularly within the industrial sector. We have seen large downgrades over the last 18 months since the tariffs were introduced. Looking at overall profitability across Asia, the industrials and cyclicals have taken it very hard. The consumer-facing sectors have been more resilient, but we are seeing increasing signs that this is also slowing down. That’s a trend not just in Asia, but across the world – a manufacturing recession, but a resilient consumer.”
Week past
UK services Purchasing Managers Index (PMI) (November, final) – Britain’s services sector capped three months without growth in November. The IHS Markit/CIPS UK Services PMI index fell to 49.3 from October’s 50.0, marginally behind consensus expectations.1
US services PMI (November, final) – Economic activity in the US non-manufacturing sector grew again in November, marking its 118th consecutive month of expansion. The index was at 53.9%, lower that the October reading of 54.7%.2
Eurozone Gross Domestic Product (GDP) (Q3, 3rd estimate) – Eurozone GDP growth was confirmed at 0.2% for the quarter, in line with initial estimates and with analysts' forecasts. Year-on-year, GDP was unchanged at 1.2%. Household consumption was the strongest support for growth across the region.3
UK industrial and manufacturing production – Britain’s economy stagnated in the three months to October following weakness in the manufacturing and construction industries. Year-on-year GDP growth slowed to 0.7% in October, the lowest rate of growth since March 2012.4
US jobs data – the US economy added 266,000 new jobs in November, as 48,000 striking auto employees returned to work. Economists had expected job growth at 187,000 in November, up from 128,000 in October.5
1 UK services sector hobbled by politics – PMI, Reuters, December 2019
2 Non-Manufacturing Institute for Supply Management Report on Business, ISM®, December 2019
3 Eurozone economy nudges ahead in third quarter, ShareCast, December 2019
4 UK economy flatlines in run-up to general election, The Guardian, December 2019
5 Record US jobs growth persisted in November with end of General Motors strike, The Guardian, December 2019
Week ahead
US inflation (November) - Prices are expected to rise 2% year on year and 0.2% month on month, allowing the Federal Reserve to keep rates on hold. The Federal Open Market Committee meets this week and no change is expected from the current 1.75%.6
European Central Bank (ECB) rate decision - No change in rates expected in the first meeting for new ECB president, Christine Lagarde.6
French, German & Eurozone manufacturing PMI (December, flash) – Manufacturing data has been showing signs of improvement. Consensus expectations are that Eurozone manufacturing will continue to be in negative territory but will show pressures are easing.6
UK wage data – Average earnings are expected to rise 3.8% over the quarter, keeping ahead of inflation.7
6 IG Index, week ahead, December 2019
7 FX Street, Economic Calendar, December 2019
The opinions expressed are as of December 2019 and are subject to change at any time due to changes in market or economic conditions. The above descriptions are meant to be illustrative only.
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