Brexit brings “interesting times”

May you live in interesting times is an expression often called the “Chinese Curse”. While the constant discussion over the UK’s departure from the EU may have become more than a little tedious over the summer when any decision seemed unlikely, over the past few weeks the process has become far more “interesting” as the rush towards a deal has increased in tempo.

A cynic would conclude that ultimately the whole process was doomed to failure given the impossibility of finding a solution to several key issues not least of which is the question of the Irish border. And so it has proved overnight with talks ending with no deal. There is no doubt that progress had been made over the previous few weeks, but the impossible simplicity of the border question proved insurmountable.

Sterling opened in Asia this morning appreciably lower than it closed in New York on Friday.

Having closed at 1.3154 as a certain amount of the week’s optimism had faded, it opened this morning at 1.3085, although it has rallied a little and was last trading at 1.3113 (06.00).

The one silver lining in the cloud of disappointment is that at least the Prime Minister doesn’t have face a hostile Parliament to explain why she stuck so rigidly to her Chequers Proposals. However, this doesn’t mean that she will not face a leadership challenge as her ability to lead the Party continues to be questioned.

This issue will continue to be at the centre of any further talks, but the UK cannot have anything other than an open border since that is a singular plank of the Good Friday agreement, while the EU cannot have an open border effectively between itself and a non-member nation.

Until one of those positions’ changes, a hard Brexit is becoming more of a reality and that will certainly close the border.

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Trump continues “Fed bashing”

In a series of unprecedented comments, President Trump criticised the Fed last week, calling the decisions to hike rates as “loco”. There have been several examples of his belief that he “knows better” than officials he has appointed, but nothing comes close to his remarks about the latest Fed actions.

The Fed is hiking short-term rates and at the same time reducing the size of its balance sheet that had ballooned in size as it had pumped liquidity into the system. That reduction in liquidity has driven long-term yields higher and created a significant correction in stock markets globally which started with the Dow Jones Index which lost a net 1,100 points over the week. However, the lack of confidence in the Federal Reserve alluded to by the President has added a significant degree of uncertainty when added to concerns over a trade war.

The dollar has become a victim of these underlying disputes and has reacted to the fall in risk appetite. The uncertainty surrounding other asset classes has been driving the dollar index which had an almost identical range for the past two weeks; a high of 96.16 and a low of 94.95.

The fourth quarter continues to provide volatility and with the midterm elections fast approaching, that volatility is unlikely to drop.

Draghi expresses disappointment with Rome

Mario Draghi, the ECB President, and an Italian, has weighed into the discussion over Rome’s budget by calling for a calming of the threats emanating from the populist Government to Italy’s continued use of the single currency.

Draghi commented that “A budgetary expansion in a high-debt country becomes much more complicated…if people start to put in question the euro”.

It is unlikely that this issue is going away anytime soon as the deadline for the presentation of the budget to Brussels expires today. The situation remains delicate as any further criticism of Rome’s plans by Brussels could simply fan the flames of nationalism.

On the subject of rising nationalism, there have been far right demonstrations taking in place in Germany over the past few weeks that were countered by an anti-right-wing demonstration on Saturday which attracted more than 100,000 attendees. This was the backdrop to the Bavarian State Elections which took place yesterday and were pretty much an unmitigated disaster for Angela Merkel’s coalition partner, the CSU, which had its worst showing in sixty years.

The centre-left SPD party, the Green’s, and most worryingly the nationalist AFD, all gained considerably with the CSU gaining just 34% of the vote and losing its overall majority for the first time since the war.

The euro has so far not reacted to the result, closing at 1.1559 versus the dollar on Friday and opening just a few points lower this morning, although it has barely moved so far, remaining in a narrow range.