Can the UK find a Brexit deal?

For more than three years the UK, its economy, and currency have been driven almost exclusively by Brexit. The deadline for departure has been extended twice and the entire process has become embroiled in party politics which have cost two Prime Ministers their jobs and is currently threatening a third.

As the third deadline for departure looms, Parliament has passed a law banning Boris Johnson from carrying out his threat to leave without a deal if Brussels cannot or will not agree to changes to the Withdrawal Agreement negotiated by his predecessor, Theresa May.

While May has gained a degree of infamy for her role in what Brexit has become, it is Parliament itself that is the true “villain of the piece”. A fundamental error was made at the outset of negotiations in that the issue should never have become divided along Party lines since there are remain and leave supporters on both sides. Opposition parties far from deciding their own strategy saw an opportunity to create discord by simply placing obstacles in the path of any progress.

That is the “state of play” as the clock counts down towards October 31st.

Johnson’s suspension of Parliament is being challenged in the High Court. This is an exercise in futility since MP’s would not be sitting in any case since its the time of year when each of the Parties would be holding their conferences.

Sterling is driven by almost every nuance of the Brexit process. Unless there is a major event, in the next three weeks, the market will await the EU Summit on 18/18 October at which Johnson is confident a deal will be agreed.

Tomorrow the Bank of England’s rate-setting Monetary Policy Committee will meet. As has been the case at every recent meeting, there will be no change to short-term rates and in his post-meeting press conference, Governor Mark Carney will talk about rising inflation and the threats to the economy from a no-deal Brexit and that the Central Bank is prepared for every eventuality.

Yesterday, the pound rallied to close to a six-week high versus a weakening dollar as traders trimmed short positions. It reached a high of 1.2528 and closed at 1.2499. Versus the single currency, it climbed above 1.13 for the first time since June 6th reaching 1.1314 and closing at 1.1283.

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Market awaits Fed decision

At 7 pm BST today, the Federal Reserve will announce its decision on whether they have decided that the slowdown in the U.S. economy is enough to warrant lower short-term interest rates.

Since Jerome Powell took over as Chairman in February of last year, the Fed has been a more reactive Central Bank mirroring Powell’s style as a Lawyer.

In modern history, the more “renowned” Fed Chairs have bene more proactive giving the markets advance guidance of their actions and raising or cutting rates in a more preventative manner.

The current scenario, while not being criticised by any market participants (that has been left to President Trump), has led to a greater degree of speculation as the FOMC meetings approach.

The current meeting is a classic case in point. Recent data has been mixed, with comments and speeches from members of the Committee being ambiguous at best. The economy is clearly slowing although inflation is still close to the Fed’s 2% target. The question remains: “How much of a slowdown is required for the Fed to cut again?”

The answer to that question will be revealed later today and the dollar will no doubt react accordingly. The effect of any cut in rates will be short term and it is doubtful that Powell will change his stance on advance guidance. If that is the case, the market will quickly move on to the next driver while remaining “out of the loop “as to the Fed’s medium-term intentions.

Yesterday, the dollar index fell to a low of 98.19, erasing most of its gain from the previous day. It closed at 98.22.

Does the Eurozone have a future?

Over the past twenty-five to thirty years as trading in financial markets has become more liberalized and technical advances have allowed the globalisation of risk, Deutsche Bank has been at the forefront of every advance growing both pre and posit Eurozone into a pre-eminent player.

In the past couple of years, that pre-eminence has faded to such an extent that earlier this year, Deutsche Bank made 15,000 of its staff, primarily in its trading rooms in London and New York, redundant, announced its withdrawal from several markets, and retreated back to its core domestic market.

In the latest quarter, the bank lost Eur 3.15 billion mostly due to the cost of restructuring its business.
What was it that caused this massive fall from grace? While other major institutions have also suffered, no one else has taken such draconian measures. The answer lies in its commitment to the Eurozone and the bad loans that remain outstanding from the Global Financial Crisis that took place over ten years ago.

The European Central Bank has to a large extent ignored the massive need for fresh capital to be introduced to nearly every bank in the region allowing their loss provisions and capital adequacy to fall to dangerous levels. The current downturn which may turn into a region-wide recession could see the demise of several prominent financial institutions which do not have the resources of a Deutsche Bank.

When the Financial Crisis first hit, the phrase “too big to fail” was coined in relation to several U.S. and UK banks and the effect their failure would have on the global economy. That was not seen as being as severe in Europe but now the “chickens are coming home to roost” as just about every element of the economy weakens. Banks facing huge bad debt issues cannot lend despite the ECB making every effort to make funds available.

Forget Deutsche Bank for a moment, Greek Banks bad loans are 41.4% of total assets while in Cypriot Banks the percentage is 21.3%. While total bad loans have fallen from close to one trillion euros in 2014 to Eur 587 billion in March of this year, this is now the core of the outstanding debt. The ECB recently bent the rules to allow banks to take nine years, as opposed to the more conservative seven years that is the norm in other jurisdictions, to fully provide for these losses. This was of relief to Italian Banks that were teetering on the brink of collapse.

The euro has been in a gradual downward spiral since reaching 1.2550 versus the dollar in February last year. Yesterday, it managed to claw its way back above 1.1000 although this was more due to a weaker dollar. It made a high of 1.1076, closing just three pips from the high.