“No man is an island entire of itself,
Every man is a piece of the continent, a part of the main.”
A group of our teammates are in London this week and, as they are discovering, the United Kingdom is once again becoming largely an island. It was barely three weeks ago, but the referendum on June 24th has set in motion a series of events that are likely to negatively impact business activity in the U.K. and Europe proper for some time to come.
Interestingly, the OECD actually suspended publication of its monthly leading indicators based on Brexit saying:
“The CLIs cannot…account for significant unforeseen or unexpected events, for example natural disasters, such as the earthquake, and subsequent events that affected Japan in March 2011, and that resulted in a suspension of CLI estimates for Japan in April and May 2011.
The outcome of the recent (23 June) Referendum in the United Kingdom is another such significant unexpected event, which is affecting the underlying expectation and outturn indicators used to construct the CLIs regularly published by the OECD, both for the UK and other OECD countries and emerging economies.”
So the moral of the story is: if you don’t like the numbers, just suspend reporting them. That’s one way to deal with adversity anyway. Practically speaking, it is pretty difficult to call Brexit an unforeseen event. Perhaps it was viewed as improbable, but hardly unforeseen.
Back to the Global Macro Grind…
The FTSE has largely shaken off the impact of BREXIT and is now approaching 52-week highs. The British pound on the other hand remains at close to 52-week lows and has barely budged since collapsing after the June 24th referendum. Perhaps no currency is an island?
In the short term, the stock market may be getting this close to right. The dramatic fall in the pound makes British exports very cheap and since the unwinding of Britain’s membership will take some time, the more than 50% of British exports that go to the EU will remain intact. Over time these exports will be at risk, or subject to some level of tariff.
Growth in Britain was questionable at best leading up to the referendum. In fact, the quarterly survey by the British Chamber of Commerce, based on the responses of 8,200 firms, highlighted this anemic growth point this morning. According to the survey, several key indicators remain at low levels with “a fall in domestic and overseas sales in the services sector and manufacturing at historic lows.”
Back on the continent, the ECB’s Hansson, in an interview with the Wall Street Journal, continued to affirm the view the Brexit will be a headwind for Eurozone growth. The BOE minutes that were released over night, make a very similar point and indicate the BOE is “ready to take action.” So if there is a collective takeaway, it is that interest rates in Europe are likely stay lower for perhaps much, much longer. (And we haven’t even started to talk about Italian banks ...)
Speaking of central banking, the Japanese are turning to The Bernank for input. Yesterday, former Fed Chairman Ben Bernanke reportedly met with BoJ Governor Kuroda. This comes at a time when the Japanese are experience lower than expected growth, lower than expected inflation, and also contemplating ending or slowing their bond repurchase program as they come to the “end of the bond market.” It may not be long before we see helicopters over Japan dropping money...
The “unforeseen” event that might require the OECD to stop publishing numbers on the U.S. is probably related to the election. Specifically, this week the Never Trump forces have their last shot at derailing his candidacy. As our colleague JT Taylor from our Washington, DC office writes in his morning Capital Brief note (email if you’d like to be added to the distribution):
“With less than a week to go until the convention, anti-Trump forces are scrambling faster than ever to dethrone the presumptive nominee. Removing Donald Trump may be their main objective, but another option is being weighed – attempting to select his veep akin to an arranged marriage. The nominee's running mate is still technically decided by an independent delegate vote and delegates have no obligation to support the nominee's choice. The Rules Committee is set to meet later this week to decide convention rules and the party platform, and we doubt any coup will succeed, but this could get interesting depending on Trump’s highly anticipated pick reportedly coming at the end of this week.”
So this week will basically be the last chance to stop Trump, but both JT and our colleague former Secretary of Energy Spencer Abraham, who formerly served on the Rules Committee, believe this is much ado about nothing and Trump will march on uncontested. Regardless, the Republican Convention is likely to make for some interesting T.V. next week.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.33-1.52%
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research