December 5, 2017 / 8:30 AM / a year ago

Daily Briefing: Brexit - circle unsquared

LONDON (Reuters) - Yesterday was yet another day of confusion over Brexit with, in essence, the British government still unable to deliver a position it can sell at home.

Britain's Prime Minister Theresa May and European Commission President Jean-Claude Juncker leave after making statements at the European Commission in Brussels, Belgium, December 4, 2017. REUTERS/Yves Herman

Whether Theresa May misjudged the likely reaction of her Northern Irish DUP allies to a proposal to maintain the current border status quo with Ireland, or whether the DUP freaked out at the last minute, it amounts to the same: the circle was not squared.

May is in the unhappy situation of having to deal with the political contradictions inherent in a Leave campaign which told voters Brexit would be a win-win, pain-free process. All that said, talks with the EU on overcoming the deadlock on the so-called “phase 1” issues will now continue ahead of the Dec. 14-15 summit and the EU is as keen as London to move on.

May said she was still confident of reaching agreement although it is far from clear at this stage what would be acceptable to the DUP and Dublin; and don’t forget also that there may still be outstanding issues on the role post-Brexit role of the European Court of Justice in resolving disputes with British involvement.

The consensus of the commentariat is that this has revealed yet again the weakness of the British negotiating position and also May’s limitations as a politician and communicator: but does it make the chances of her government falling any greater? Whatever happens in the next couple of weeks, 2018 promises to be very interesting.

Euro zone finance ministers last night chose as their next chairman Portugal's Mario Centeno, a move that some are seeing as at least symbolic of the shift away from post-crisis austerity in the 19-country bloc. Once compared by Germany's Wolfgang Schaeuble to Portuguese soccer star Cristiano Ronaldo, Centeno reversed some of the austerity measures introduced during Portugal's bailout but still managed to keep a grip on public finances.

His appointment could also embolden countries seeking deeper integration of the single currency zone, including the creation of a budget of its own - something Berlin currently opposes. The European Commission is due to publish its own ideas on the subject tomorrow.

On the economic front, PMI figures for November due to this morning for economies ranging from Spain to Italy, France and Germany are expected to see the region consolidating its existing strength, even moving slightly forward. It could be a different story for Britain, whose giant services sector is expected to bear the brunt of the squeeze on consumer spending in the coming months as inflation peaks and wage growth remains weak.


Brexit and Trump were the defining market obsessions of 2016 and so it’s striking that they continue to dominate the agenda at the end of 2017 too. The initial positive reaction on world markets on Monday to the U.S. Senate clearing the way for U.S. President Donald Trump’s long-awaited tax cut plan turned far more nuanced by the close, where Wall St continued with its recent trend to rotating out of the year’s darling tech stocks and into other sectors such as financials and retailers.

That switch led to the unusual sight of the Dow Jones index ending higher after another intraday record while the tech-heavy Nasdaq ended more than one percent lower. The S&P500 was slightly in the red with the Vix volatility gauge propped up as high as 11.68 percent.

While the tax cuts have likely passed their final major hurdle, there was some trepidation about reconciling the bills amid Republican concerns about the deficit implications, angst about this week’s latest U.S. debt ceiling deadline and wariness of further developments in the investigation into Trump’s pre-election Russian links.

The implications of the fiscal stimulus for tighter Federal Reserve monetary policy going forward was also a factor, one which also helped the rotation to financials. The dollar and U.S. Treasury yields also turned flatter after Monday’s initial jump, however, while the MSCI all-country world equity index edged lower on Tuesday. Shanghai, HK and Tokyo were all in the red, with Seoul’s Kospi bucking the trend to end 0.3 percent higher. Dollar/yen outperformed on the currency majors, with euro/dollar flat.

Sterling was also on the back foot early on Tuesday after Monday’s hopes of a breakthrough in the long-running Brexit negotiations were dashed. Widespread expectations of an agreement between the UK and the European Union on the final sticking point of Irish border had lifted the pound sharply early on Monday, bringing it close to its highest levels since June against the euro before a sharp recoil when Northern Ireland’s Democratic Unionist Party effectively stalled the deal by objecting to the language on a post-Brexit “regulatory alignment” of certain trade relationships both sides of the Irish border.

Negotiators will return to the table to see if some compromise can be made before the crucial EU summit, on which hinges any hopes for a green light to move to Brexit trade talks next year.

The Australian dollar gained as much as 0.8 percent to a three-week high of $0.7654 following strong economic data and a relaxed tone from the country’s central bank on the currency’s level. The fizzle-out of a rally in Wall Street and Asian stocks overnight pointed European markets to a more muted start as well, though futures for the cyclicals-heavy and dollar-exposed DAX were up 0.2 percent.

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