Clean Brexit and a Stronger Dollar...
Blain’s Morning Porridge – Jan 18th 2017
“And what could be more glorious than to challenge the Emperor himself in the great arena?”
Readers of the morning porridge will be familiar with the concepts of Game Theory. Although the best optimal outcomes can be achieved through cooperation, greed, doubts as to others intentions, and “external influences” means each side will likely attempt to garner a better solution for themselves – call it the prisoners’ dilemma or the politics of Brexit negotiations…
Yesterday’s clarification from Theresa May on Brexit was pragmatic. She called it smooth and orderly, but the UK markets have taken to the new “Clear and Clean” Brexit strategy well. It provides some certainty where the vagaries of “Hard” or “Soft” Brexit didn’t. The great and good, the global gods of finance and trade, currently gathered for the Davos gabfest have opined and generally pronounced it good…
European reaction has been more mixed – reflecting the other side of the game: it’s in the interests of many European politicians, and especially the EU technocratic classes, to trade a pragmatic clean break with the UK against their political interests – which are many and legion.
Who amongst Europe’s glitterati of world class politicians (US Readers: Mild Sarcasm Alert) would want to be seen to play soft to the UK? Well, any of them – like Tusk who called it realistic and negotiable – who realise preserving jobs and driving growth across Europe is best served by a pragmatic Brexit. But, such optimal game theory solutions would be “unusual” across Economic History. The result is the coming months ahead of Article 50, and subsequent years of negotiation are going to continue driving markets up, down, and shake-it-all-about on each and every “significant” statement, election or agreement.
There is no need to panic. (At least not yet.)
But, the bottom line is Brexit will continue to drive vol. Get used to it. I can’t help but wonder if the sterling rally was simply because there weren’t any more sellers and they capitulated.
The Brexit Games will continue…. They have only just begun….
Of equal significance this morning, I suspect, is Trump’s comment about the dollar being too strong.
Wowser.
That’s a shocker for a president-elect. Of course, he’s got a point… but that fiscal reflation trade is what’s been driving market sentiment into the stratosphere. Is he now proposing a currency war as he blames China? Heaven forbid.
Its difficult enough wondering how much of his deliberate bluster is “just part of the Donald deal” process, or if he really doesn’t get how significant his every utterance is in face of global financial complexity? Idiot or Genius? Give him the benefit of the doubt and he might just even have made a very very smart comment – taking heat out the game. Dollar strength is a possible downside: the potential effects of some of the proposed US tax chances – particularly the border-adjustment tax could see the dollar rise a further 25% according a report on CNBC. Dollar strength could significantly impact the benefits of new policy.
Meanwhile, President Xi treated Davos to imagery about the dark room of protectionism and the “sunshine and air” of open economies… Words, words, and yet…
Something prompted me last night to grab my copy of the Decline and Fall of The Roman Empire last night – I must read up on some of the more garrulous emperors and how the barbarians of the steppes became the new Romans.
Meanwhile.. some very interesting stuff going on in markets – but let’s wait for next week for clearer direction after tomorrows “festivities” in Washington…
Out of time…
Bill Blain