Brexit is going down to the wire. We are hurtling towards 29 March with scant evidence the EU-UK are closer to resolution. Political brinkmanship has damaged GBP (although Euro has not performed well either), with traders selling upticks and buying low volatility.
Today UK Prime Minister Theresa May will brief the House of Commons on the progress of Brexit negotiations. We are doubtful of any breakthrough. May is expected to announce a meaningful vote for 27 February, but that is unlikely to appease anyone. Remainers need a new trick, since the last vote – a huge loss for May – failed to upset the political order. European Union Brexit negotiator Michel Barnier suggested that May endorse a permanent customs union, also supported the UK opposition Labour Party.
The UK economy is clearly weakening. Sharp declines in investment are victims of Brexit uncertainty. This is just common sense. UK Q4 GDP declined 0.2%, down from +0.6% in the Q3. For 2018, GDP growth slipped to its lowest since 2012, at 1.4%, slowing from 1.8% in 2017. Given a similar slowdown in Europe, it is hard to say how the UK would have performed without the spectre of Brexit. Italian growth forecasts have been reduced from 1.2% to a paltry 0.2%.
Sino-US tariffs postponed?
Trade talks resumed on Monday and appear to be on a good track. Mid-level officials have opened discussions while high-ranked officials should take the lead on Thursday and Friday, including US Trade Representative Robert Lighthizer, US Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He. We suspect progress could trigger a Trump–Xi meeting by mid-March with US tariffs being postponed. USD/CNY is currently trading at 6.7798, approaching 6.7745 short-term.
Consumption in China is at its lowest in 15 years and trade data shows clear signs of weakness. January imports fell 10%, the biggest drop since July 2016. China’s economy could be slowing more sharply than initially thought, although Lunar New Year holidays probably hit January and February activity. The Sino-American trade conflict might be weakening manufacturing and trade figures, but the drop in domestic demand plays a bigger role, forcing authorities to boost domestic demand by reducing import tariffs and providing liquidity stimulus.