‘I eat carefully because people don’t want to see a large person judging cakes. They’ll think to themselves, “That’s what happens when you eat cake” ’ - Mary Berry
So I read that the terms “Brexit” and “Donald Trump” were among the most common search terms on Yahoo in 2016. Who would have thought this a year ago? Now we are probably not surprised and I predict little will be different in 2017.
Other changes are apparent too. I am still getting over the report earlier in the week that Italian panettones were proving more popular than traditional UK Christmas puddings in terms of sales at one exclusive UK retailer. Well I am glad that one Italian export is doing well because given the high likelihood of a ‘no’ vote in this weekend’s constitutional referendum the country is going to need all the help it can get.
Let’s not get too pessimistic though: the European Union is not on the cusp of some new panic. I spent some time in Milan a month or so ago and everyone I spoke to was convinced even back then that a ‘no’ vote would prevail. When something is generally anticipated then its impact tends not to be large. And let us not also forget that after 63 governments in 70 years Italy’s problems are not going to be solved by embracing less Europe – it should be embracing more.
Who remember ‘Grexit’ or the general expectation that Greece would leave the European Union once the populist Syriza party with their anti-euro/anti-austerity ticket were elected? The trouble is when a country and its banking system has too much debt and is overly strained – as is the case in both Greece and Italy – you cannot make a decision to cut and run. If an individual burdened with a high credit card and mortgage bill tried to walk away the banking system would view them as toxic for years and years to come. It is the same with a country.
So if Italy and Greece are staying surely the UK is still leaving the European Union? I would agree with this but note that in most circumstances you ‘cannot have your cake and eat it’. Of course politicians like to break the rules…and so earlier this week we have seen copious analysis of the scribbled comments from a ministerial aide direct from a high-level meeting 'accidently’ caught on camera by a group of political photographers. Mistake or a subtle leak to see what the impact was?
What is less indisputable is that a 'hard Brexit’ - like the worst-case scenario from the Prisoner’s dilemma classic game theory insight - is a 'lose-lose’ (as are most major trade disputes). Using the last set of full data available, 51.4% of British goods exports go to the European Union, whilst 6.8% of overall European Union goods exports go to the UK.
Despite a full range of politiking from both sides cooler, saner heads should prevail given the extent of the trade linkages at a time of pretty shabby economic growth rates compared with historical trends - a point reiterated in last week’s Autumn Statement. And what do I read sprayed across the front page of one of the more established UK broadsheets?
‘Britain is leaning towards a softer Brexit after ministers admitted that they were considering plans to allow low-skilled migration and could pay to access the single market after leaving the European Union. The government does not want to end up with damaging labour shortages’
I should coco. In addition, you can see the impact as shown in terms of more popular opinion. A series of recent polls under the title of 'What do voters want from Brexit?’ highlighted that even a majority of 'Leave’ voters agreed with assertions such as: 'EU citizens already living in Britain should remain there’; and 'Allow EU boats to fish in British waters and vice versa’. It makes you wonder what all the wailing and gnashing of teeth in late June and late July after the referendum result was all about.
If you put it all together global investors currently worry too much about Europe and Brexit and probably too little about Donald Trump given the US markets continue to trade at/around all-time highs. Still now we are in December the lure of Santa Claus will influence markets more than any of these issues despite the Federal Reserve in the United States being likely to raise interest rates in mid-December.
Next year however will be more of a challenge. Lots more on that in a week’s time. First though I have to see if I can put my hands on a reasonable quality panettone – I’ve stashed in a cupboard a couple of traditional British Christmas puddings already.
Chris Bailey has 20 years of investment industry experience at long-only and long-short institutions as a global multi-asset fund manager, strategist/macro thinker and, in the earlier part of his career, as a securities and fund analyst.
In 2013 he founded Financial Orbit focusing on daily macroeconomic comment and securities analysis.
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