In this briefing:
- FLASH: UK Back to Brussels with Bruises
- The Year of Dithering Dangerously
- Macro Debt Risks in China According to the PBOC
- FLASH: UK’s No-Confidence Vote in May Day
- China’s A-Share Market Comes of Age, Slowly
1. FLASH: UK Back to Brussels with Bruises
- Theresa May won the confidence of her parliamentary party by 200 votes to 117 after pledging to hand over before the next election and suggesting an early exit.
- Large-scale opposition to her leadership diminishes authority, but an inability to re-challenge her for a year provides some space for pivoting even softer if needed.
- Attempts to improve the backstop can now resume. A stated intent to make it a deal the DUP can tolerate makes it much more challenging to fix swiftly.
- Unless the European Council sounds surprisingly open to change tomorrow, talks are likely to drag on and deprive the BoE of the clarity needed to hike in Feb-19.
2. The Year of Dithering Dangerously
President Joko Widodo, cabinet-level policymakers and the broader political elite are neglecting the imperative for economic reform at a particularly critical juncture. Prospects for improvement in a second Widodo term are questionable.
3. Macro Debt Risks in China According to the PBOC
If there is one thing China is acutely aware of it is the debt risks. For many years, I questioned whether China even understood the enormity of its debt risks. Due to a number of factors, I have actually become quite convinced that yes they do understand these debt risks. It should be emphasized that just because they understand the size and enormity of the debt risks does not mean they are going to take corrective steps that in normal financial markets we would expect (I will return to this point later). However, they do clearly grasp the underlying risks of the debt buildup.
4. FLASH: UK’s No-Confidence Vote in May Day
- The threshold for a confidence vote in UK Prime Minister Theresa May has been triggered and will be held at 6pm GMT, with results available at about 9pm. I expect Conservative MPs to oust May now rather than be bound to keep her as Leader for another year.
- It is likely to be a close vote. Either way, the political outlook will change. Replacing Theresa May would take a few weeks and would raise the risk of a managed “no deal” Brexit, as candidates compete for the Eurosceptic membership.
5. China’s A-Share Market Comes of Age, Slowly
- The Shanghai-London Stock Connect is set to launch in December
- These new investment channels and MSCI inclusion transform a market long viewed as a casino
- Beijing’s distrust of markets still leaves shares subject to political whim
- Sheer size means China’s markets could dominate EM portfolios for years to come
- First-rate trading and settlement systems, but idiosyncratic listing procedures
- Institutional investors and foreigners still play a limited role
- High leverage has put wider economy at risk in event of a market crash
