Brief Macro: FLASH: UK Denying No Deal Does Not Reduce Risk and more

In this briefing:

1. FLASH: UK Denying No Deal Does Not Reduce Risk
2. UK Fiscal: Waiting While Brexit Burns
3. SHIBOR and Rates
4. Global Tech Breakup
5. UK Politics: Intransigence Meets Incompetence

1. FLASH: UK Denying No Deal Does Not Reduce Risk

• The UK parliament voted to reject leaving with no agreement, as widely expected. Shambolic management around that looks set to force ministerial resignation.
• Parliament continues to indulgence itself in motions against leaving the EU without a deal, but that doesn’t stop it being the default defined by current laws.
• I still see the relative probabilities of a deal, no deal, and no Brexit at 45:35:20.

2. UK Fiscal: Waiting While Brexit Burns

• The Spring Statement revealed marginally more fiscal room and no significant policy changes, consistent with the Chancellor’s intent to downgrade the event.
• Fiscal policy can respond to the Brexit outcome, despite total financing rising on a heavy redemption profile. Net liabilities look weirdly skewed away from gilts.
• Recent complaints about the RPI are being considered with a response planned for April. Changes to its use are more likely than to the measure’s methodology.

3. SHIBOR and Rates

There are two important points worth noting. First, China remains an overwhelmingly short term capital market from the money markets to structured deposits to bond duration which remain heavily tilted towards durations under five years. Second, what we are seeing in the money markets accords with the PBOC unofficial policy of trying to keep the headline rate unchanged but nudge down the unofficial rates.

4. Global Tech Breakup

By Eleanor Olcott, China Policy Analyst at TS Lombard

• Washington’s political drive to block Chinese access to US high-end tech is creating uncertainty in the industry
• The immediate effect is the redirection of Chinese VC money away from the US to Asian and European rivals
• The long-term trend is of  two rival centres of technology production- one focused on Shenzhen, the other on Silicon Valley

5. UK Politics: Intransigence Meets Incompetence

• The government has lost its second attempt to secure support for its Brexit deal by 149 votes, versus 230 first time. A Wednesday vote is set to reject no deal before one on Thursday leads the government to request an Article 50 extension.
• A third meaningful vote may arise as the cost of EU conditions is compared. An expensive extension to the summer is likely, though that may not thaw relations. An unlikely general election wouldn’t help, but a new Conservative PM might.
• Intransigent positions among an arguably incompetent current crop of political actors have significantly raised the risk of no deal. I now see the relative probabilities of a deal, no deal, and no Brexit at 45:35:20, versus 55:25:10.