Apparently, the UK’s exit from the EU is going to be delayed by “up to a year” on Wednesday, a laughable outcome befitting of the farce Brexit was always destined to be.
We’re just going to reprint some previous commentary here because these passages (including the quote from The Guardian) have stood the test of time. To wit, cobbled together from multiple posts published here over the past couple of years:
Brexit is an amorphous concept that had symbolic meaning to the extent it conveyed something about public sentiment, but had little to no practical applications at the time of the referendum.
Effectively, Britain voted to do something and then left it to policymakers to figure out what it was they had voted to do.
“Brexit was offered as a single liberating proposition, when in fact it involved multi-layered consequences and implications that require negotiation with others”, The Guardian’s Martin Kettle wrote in July, summarizing one of the more absurd manifestations of the semi-global populist upsurge that swept Western democracies beginning in 2015.
If we’re all being honest, nobody involved has a clean read on what the implications of a “hard”, “soft” or “moderate” Brexit would be for the U.K. and/or for the E.U. And again, the confusion stems directly from the fact that nobody knows what Brexit even is. It’s pretty difficult to evaluate the relative desirability of multiple variants of something when you don’t even know the meaning of the thing in the first place.
Theresa May’s future hangs in the balance – her deal was shot down three times in Parliament and efforts to break the deadlock have generally come to nought. UK lawmakers have failed to find anything that even approximates consensus on any Brexit variant. At this juncture, canceling the whole thing could well be the best option.
Meanwhile, monetary policymakers are having their own “exit” problems. And just like the UK, the timeline for an exit from post-crisis accommodation appears set to be pushed back by at least a year and it could well be that the normalization effort has to be canceled altogether.
The ECB will on Wednesday underscore the message from the March meeting, at which Draghi and the GC delivered what many saw as a kitchen-sink cut to the 2019 growth outlook. Forward guidance on rates was “enhanced” (read: the first hike was “officially” pushed out, something markets knew a long time ago) and a new round of TLTROs was announced, to the surprise of some market participants who perhaps thought the central bank would wait another couple of months.
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Germany’s ongoing stumble towards a (hopefully) shallow recession and Italy’s predictably precarious position left the ECB will little choice but to go back down the accommodation/stimulus road. The pivot came just three months after net asset purchases ceased, vindicating those who, in December and January, gently suggested that the window had closed – that halting asset purchases when the euro-area economy was clearly decelerating would likely lead to an about face sooner or later. It turned out to be “sooner”.
So, here we are. Not much is expected from the ECB on Wednesday, although obviously, market participants will be keen on extracting any details they can around the new TLTROs and finding out where the tiering discussion stands amid rampant speculation.
One thing we know is that the ECB’s dovish pivot (which cemented the coordinated global CB relent last month), has helped drive cross-asset vol. into the floor and it’s also helped ensure that euro credit bulls can sleep easy at night.
“Euro credit bulls can rest assured the rally has legs. Dovish central banks have fueled this year’s gains and only they seem capable of stopping it but for the ECB that’s unlikely any time soon”, Bloomberg’s Tasos Vossos wrote on Wednesday, adding that “over the past month, money markets have wiped away prospects of any hikes through mid-2020.”
60bp has been something of a line in the sand for euro high grade in the past, so it’s possible the rally will be exhausted soon, simply by virtue of having reached the theoretical limits. “High grade yields are close to breaching 80bp, not far now from their all-time lows of around 60bp in September ‘16 — and recall that this was a period of ‘peak QE’ with the ECB buying €80bn of bonds a month, including corporate debt”, BofAML wrote last week.
Meanwhile, Draghi’s forward guidance has succeeded in keeping rates vol. suppressed in virtual perpetuity, come hell or high populism. That’s no small feat considering just how fraught the political backdrop has been in the euro-area over the past three or four years.
In any case, all of the above is arguably conducive to an ongoing morass as political entropy perpetuates a “noisy status quo” where the decibel level of the cacophony and the sheer number of headlines around politicians’ various trials and tribulations render markets numb and otherwise desensitized. Meanwhile, a sluggish (at best) global economy and still-subdued inflation virtually guarantees dovish forward guidance from DM policymakers, a veritable vol. killer.
“The debate about how fast the global economy is slowing, rages in the background, while markets divide themselves neatly into those which are affected by the economics and those affected by the monetary policy backdrop”, SocGen’s Kit Juckes wrote Wednesday, adding that “government bond yields are anchored by rates, corporate bonds are enjoying an orgy of issuance, and the FX market is watching volatility either vanish or go and hide in the most exotic parts of the market.”
