(Forbes) Gray clouds gonna clear up? Barclays thinks so, despite the overcast outlook in the mid-term. Their global macro team sees “rays of sunlight,” however, thanks to another tariff cease fire and movement on a China trade deal, as well as Brexit risk subsiding a bit.
Investors will start the week feeling good that China’s authorities are on the same page regarding Phase 1 of the China trade agreement made on October 11, and Brexit uncertainty is now more of a Brexit certainty. That’s two less things to worry about, so ... happy Monday, Wall Street.
Nevertheless, hold on to those Dow 28,000 hats. Barclays’ senior U.S. economist, Michael Gapen, may see a break in the clouds, but he’s not predicting beach weather.
“We doubt a narrow deal on tariffs will pave the way for a broad agreement that addresses all outstanding issues,” says Gapen about the Phase 1 mini-deal with China. “Any delay or scaling back of protectionism would be welcome, given the evidence that existing measures have already reduced trade volumes, slowed business spending, and weakened confidence.”
China exports of tariffed goods to the U.S. have declined by more than 25% year-to-date, according to U.S. Census data. Nontariffed goods from China rose 10% over the same period.
Brexit Poison Pills And Fed Insurance
Last week saw Queen Elizabeth lend her support to leaving the European Union even as her Parliament tries their best to make leaving difficult.
Boris Johnson and his European counterpart, Jean Claude Juncker, agreed on a potential Withdrawal Agreement that would allow for a negotiated exit of the U.K. from the EU at end of the month.
Parliament is majority “remainer.” They keep trying to throw in some poison bills to keep the U.K. in the Union for another year, rather than for two weeks.
For now, a negotiated exit as agreed upon between Juncker and Johnson would provide some respite to both the U.K. and euro area economies, as the risks of a hard Brexit have weighed on sentiment and activity for some time.
“The odds of a hard Brexit are maybe around one in three, one in four,” says Vladimir Signorelli, founder of Bretton Woods Research, a supply side investment research firm. “It’s pretty clear that we will get Brexit on October 31. Remainers think that maybe they can have a referendum in the future about rejoining the EU. We will see how far that goes.”
Any failure to pass the agreement would likely lead to a three-month extension and calls for new elections, a big risk to Labour and some Tories outside of London.
Brexit uncertainty has already taken a bite out of the U.K. economy, with wages ticking lower in August, unemployment inching up and firms reporting fewer vacancies. Taken together, the potential for an improved risk backdrop is welcome.
The British pound rallied last week on news that Johnson was closer to putting Brexit over the finish line.
Meanwhile, incoming U.S. data shows some deceleration of economic activity. Trade-sensitive sectors have weighed somewhat on manufacturing survey data. This has been particularly evident for retail sales, which fell off noticeably in August and September after a series of strong gains up to July.
“Enhanced prospects for an interim trade deal, as well reduced risks of a hard Brexit, have seemingly moderated downside risks from external influences that might motivate additional Fed insurance cuts,” says Gapen. “With data now broadly consistent with the gradual deceleration in activity, we retain our call for additional cuts to interest rates in December and January.”
