Potential for hard Brexit has diminished; can’t rule out fresh elections or a referendum: Mitul Kotecha
China’s annual growth could be at the bottom and or below the 6-6.5% target that authorities have forecast.
Brexit or not? Is it at least headed in the direction of a Brexit?
Yes, it is clearly heading in the direction and the right direction but there is no clarity on whether the bill will be passed by parliament this weekend and in fact looks unlikely. The Labour Party has said they would not support the bill and so it looks like it that the government would find it very difficult to get it passed. What we can say is that the potential for hard Brexit has diminished but things like fresh elections or even a referendum should not be ruled out.
In the eventuality that Brexit does not go through, what are we looking at? Yesterday, when the news came, we saw a massive reaction in equity markets along with the pound which gained strength as opposed to other global market currencies. What happens if the Brexit deal gets stuck on Saturday?
The Sterling and UK markets would come under pressure if Parliament rejects the deal. We have been here before and this is not the first time that the Parliament has rejected the deal. It is going to be very difficult to get an agreement as things currently stands given the objections.
From a market perspective, in terms of the business environment and given the kind of exodus we have seen on the back of delays with regards to Brexit, how are companies going to react to this? In case, it is passed by Parliament, what kind of upside do you see?
Sterling would react pretty strongly. The reality is that investors generally have been avoiding taking any exposure to Sterling or making decisions in the environment where there is so much uncertainty. Risks have been very binary. So, you could have seen a massive downside without any agreement and yet we saw a big rally.
I do not think investors have been sitting on Sterling trade for long. Positioning wise, most investors seem to have shorted the currency. That is probably one reason why we saw such a big rally but given so much uncertainty and the potential for this not to pass in Parliament, we could even see a further delay.
The positive here is that the potential for a hard Brexit has really diminished significantly. It does look like the government wants to get some sort of a deal on the table. They have agreed with the European officials. In the near term, the risk probably is on the downside given this bias. Uncertainty in terms of how investors and companies look at this, remains very high. You will need some eventual clarity on what the final deal will look like and when it is passed through Parliament, but we are not yet there.
Was the China growth data that came in this morning, in line with your estimates? Do you think Chinese growth rate is also an important global trigger?
It is in line with TD’s forecast of 6%, slightly below the market consensus but the stand out in China states there the industrial production numbers which were at 5.8% year on year in September, were much higher than expected. It does suggest a silver lining in some of the pressures that we are seeing in China’s economy. My concern is that growth could come in at the bottom and or even slightly below the 6 to 6.5% target range that China’s authorities have forecast this year. The limited trade deal between China and US we saw just a week or so is not really going to change any of this. We need to see some substantial progress on structural issues between China and the US to really get some ground in terms of improving trade conditions for China’s economy. We are nowhere near that yet.