Brexit Comes To A Head, And While Europe And US Data Rebound, The Equity Rally Falters

Brexit comes to a head. By nearly all reckoning, the Withdrawal Bill will be resoundingly defeated in the House of Commons on March 12. The margin of defeat may not match the first rejection, but it will be the death knell to the path that had been negotiated for a year and a half. 

On March 13, the House of Commons will vote on leaving the EU without a withdrawal agreement. Most, except the most extreme partisans, think that such an act would result in a dramatic economic shock in the first instance. In any event, there does not appear to be a majority favoring such a course.  

On March 14, the House votes on postponing Brexit. There are several considerations here. Those who favor Leaving are suspicious that a delay means dilution or, even worse a reversal. Then there is a question of delay. A short delay may not resolve anything. A long delay is complicated by the EU elections at the end of May, and the protracted uncertainty is not good economically or politically. Investors will be incredulous if this measure also fails to secure a majority and a violent market response is likely. 

Once again, there does not appear to be a well thought out strategy of how to use the delay to move forward. Labour has formally called for a second referendum, but the path to it seems rather tortuous and again leaves a fog of uncertainty hanging over business and households.   

That said, the weakness at the end of last year overstated the case. The monthly GDP contracted by 0.4% in December and likely expanded by 0.2% in January. The composite PMI suggested the recovery likely continued in February. The manufacturing sector is generating mixed signals though. The February manufacturing PMI slipped to 52.0 from 52.6, but economists expect manufacturing output to have edged 0.2% higher after falling 0.7% in December.  

As a driver, the UK data offers little more than headline risk with that 400-pound gorilla of Brexit looming over it.  However, it is symptomatic of what we have been suggesting is the next turn in the plot. Just as pessimism grips many, the data will show that after collapsing in December, many economies were bouncing back at the start of the New Year.  

The pessimist case is well known. The OECD lowered this year's growth forecast. The ECB's slashed this year's growth projection by a third and still warned of downside risks. China is seemingly acknowledging its economy is going to slow even as it launched various stimulative measures including substantial tax cuts and bank recapitalization. Canada's monthly GDP contracted in the three of the last four months of 2017. The data so far for 2019 shows the world's largest economy nearly ground to a halt. The Atlanta Fed's GDP tracker puts Q1 GDP at 0.5% at an annualized pace. The NY Fed's model sees it Q1 growth at 1.4% and little improvement in Q2. 

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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