Deals on Brexit, China Trade Don't Make Those Problems Go Away
18 October 2019 - 6:58AM
Dow Jones News
By James Mackintosh
Just a few months ago U.K. Prime Minister Boris Johnson's Brexit
deal with the European Union would have been as welcome to
investors as a framed-photo handshake with Saddam Hussein. It
brings more red tape for exporters, promises not to undercut EU
regulations or labor standards and still might not make it through
the U.K. parliament.
But the starting point is everything in markets. Just like the
mini-trade deal with China being pushed by President Trump, it is
less good than the last set of discussions, and worse than how
things were before, but a whole lot better than no deal. Investors
bid up the pound over the past week as the deal approached,
although optimism faded a little on Thursday.
The jump in sterling as the deal neared amounted to a sigh of
relief from markets. The pound is back up to EUR1.156, toward the
higher end of its post-Brexit trading range, having been as low as
EUR1.073 two months ago at the height of Mr. Johnson's No Deal
rhetoric. It's also up strongly against the dollar, but the euro
exchange rate offers a purer gauge of Brexit sentiment. The size of
the rebound shows just how worried investors were that the U.K.
would crash out of the EU at the end of this month without any
agreement with its biggest trading partner.
Markets have been even more sensitive to U.S.-China trade, with
global stocks and Treasury yields picking up last week on signs of
progress.
Less clear in both the Brexit case and with U.S.-China trade is
whether the market is doing a good job of pricing the longer-term
risks. After 3 1/2 grueling years of talks, Britain will now enter
even tougher negotiations about a trade deal with the EU.
Meanwhile, the U.S. demands that China is most concerned about have
been left for future rounds of talks.
Before getting to the long run, in the near term either or both
deals could still fall apart.
Start with Brexit. The deal has already been rejected by Mr.
Johnson's Northern Irish allies, who object to the region being
left with a closer trading relationship to the EU than to the U.K.
Mr. Johnson has no majority in Parliament so could easily lose the
planned vote on the deal on Saturday. This might explain why the
pound is still below this year's high of EUR1.18 reached during
former Prime Minister Theresa May's repeated efforts to pass her
Brexit deal through Parliament.
From the point of view of investors, this doesn't really matter.
If Mr. Johnson's deal doesn't pass, parliament is likely to enforce
its demand for extra time instead, and maybe even call a referendum
on the deal.
Politically it would be hard for Mr. Johnson to insist on
leaving without a deal just because Parliament rejected his deal,
rather than put it to the voters in an election. And it would be
extraordinary indeed if European governments backed the suggestion
from Jean-Claude Juncker, outgoing European Commission president,
that there can be no extension, as that would in effect mean the EU
was ejecting the U.K.
A "no deal" Brexit that would trash the pound is far less likely
than it was.
The situation is quite different with China. The U.S. demand for
$50 billion or so a year of agricultural purchases is tricky for
China. The pattern of coming close to a deal only for it to crumble
at the last minute is well established. And when the difficult
talks begin over the U.S.'s demands for deep changes in China's
approach to subsidies, state intervention and technology transfers
there is likely to be little sign that an acceptable compromise is
any closer.
If the deals go through, it doesn't help that much. Companies
are likely to continue to put off U.K. spending decisions where
they can until the terms of trading with Europe are clear. That
could take years and involve the politically contentious extension
of the transition. Little has been solved.
In the U.S. even less will be resolved, even if the later rounds
of the trade talks also work out. A trade deal with China will be
fragile without the independent enforcement of a body like the
World Trade Organization; the chance that Mr. Trump or his
successors fall out with China again looks high, especially with
bipartisan concern about the threat China poses.
To make matters worse, Mr. Trump's anti-EU rhetoric suggests he
might pivot from his trade battles with China to a trade fight with
Europe, which would be at least as damaging for investors as the
trade war with China, and perhaps worse given the fragile state of
the region's economies.
Still, markets climb a wall of worry. There's still plenty for
investors to worry about in the manufacturing slowdown, trade, the
prospects for politicians jacking up taxes and the lack of room for
significant interest-rate cuts if and when the economy turns down.
The worst time to buy is when everything looks good, and the most
one can say today is that the outlook is marginally improved.
Write to James Mackintosh at James.Mackintosh@wsj.com
(END) Dow Jones Newswires
October 17, 2019 15:43 ET (19:43 GMT)
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