- Brexit is nearly a done deal ahead of next Friday’s deadline
- France says U.S. made key concession on global digital tax accord
- ECB begins its review and suggests policy will be on hold indefinitely
- U.S. PMI reports expected to be steady to slightly higher after trade deal
Brexit is nearly a done deal ahead of next Friday’s deadline — The UK’s smooth withdrawal from the EU is nearly a done deal. The only step left is for the European Parliament this coming Wednesday (Dec 29) to approve the Brexit withdrawal legislation. That approval will pave the way for the UK to officially exit the EU before next Friday’s Jan 31 deadline.
The Brexit withdrawal bill has already become law in the UK after the UK Parliament passed the bill on Wednesday and the Queen signed the bill. The EU Parliament’s important Constitutional Committee approved the UK Brexit legislation on Thursday by a vote of 23-3, which means that next week’s approval by the full EU Parliament is simply a formality.
The markets have already put Brexit on the backburner as a global market-moving factor since the UK will be in a smooth transition period until Dec 31, 2020. During the transition, the UK will continue to operate under the EU’s single-market rules. However, the markets will need to pay increasing attention as the year progresses because the UK could still crash out of the EU if there is no trade deal by year-end and if Prime Minister Johnson does not request an extension.
UK Prime Minister Johnson will spend this year loudly making demands from the EU and proclaiming that he will not ask for a deadline extension, which will keep the markets on their toes about the possibility of a no-deal Brexit on December 31. The red lines for the UK and EU are far apart on a trade deal. The UK is demanding a free-trade agreement but the EU saying that the UK will not get any preferential treatment if the UK refuses to abide by EU product and tax rules. The EU says it will not give preferences to a country that wants to be a “Singapore-on-Thames” right on its doorstep.
Progress on a UK/EU trade deal will be of paramount concern for the UK economy and UK markets this year. The consensus is for UK GDP growth to remain weak at +1.1% this year, little changed from 2019 and down from the pace of +1.3% in 2018 and +1.9% in 2017. The UK economy remains vulnerable and expectations are rising that the Bank of England will be forced into a rate cut. The market is discounting a 60% chance that the BOE will cut its benchmark rate as soon as next Thursday’s policy meeting.
GBP/USD rallied fairly sharply in late 2019 after the Conservative Party won by a landslide in December’s general election, which meant that Prime Minister Johnson would be able to push his Brexit withdrawal agreement through Parliament. However, sterling remains on the defensive as the markets wait to see if the Bank of England will cut interest rates and whether UK will crash out of the EU without a trade agreement at the end of this year.
France says U.S. made key concession on global digital tax accord — The markets were relieved when the U.S. and France on Wednesday reached a truce on France’s digital services tax that will allow US/French negotiations to continue through year-end. France agreed to defer the collection of the digital tax until the end of 2020 and the Trump administration agreed to hold off on its threat to slap tariffs of up to 100% on $2.4 billion of French products.
In some new and very positive news, French Finance Minister Le Maire on Thursday then said that the U.S. and France made progress towards a global blueprint for a digital tax structure. Mr. Le Maire said that the U.S. dropped its demand that the global digital tax be “optional,” which would essentially mean that no companies would pay the tax and the tax would have no reason to be on the books.
The OECD next week will hold a conference of more than 135 nations to try to agree on a globally-acceptable blueprint for a digital tax. If the U.S. were to agree to a global digital tax, then the digital tax would cease to be a trade problem for the markets because the Trump administration would stop threatening to slap tariffs on any country that adopts a digital tax. The UK, Italy and Spain are all considering a digital tax, which will attract new tariff threats from the U.S. if a global solution is not found.
ECB begins its review and suggests policy will be on hold indefinitely — The ECB at its policy meeting on Thursday left its key variables unchanged with its main refinancing rate at zero and its deposit rate at -0.50%. The ECB also left its QE program unchanged at 20 billion euros per month. The ECB left intact its guidance that rates will remain at present or lower levels until inflation “robustly converges” to the inflation target of just below 2%, and that the QE program will continue until “shortly before” the ECB starts raising interest rates.
The ECB also announced the official start of its strategic review whereby all aspects of the ECB’s monetary policy will be examined. The review suggests that the ECB will not make any changes in its monetary policy until its review is complete, which is expected to be late this year. Indeed, that is roughly in line with market expectations, although the market is discounting at least a small 20% chance for an ECB rate cut by year-end. The ECB is any case is not likely to start raising interest rates for at least two years.
U.S. PMI reports expected to be steady to slightly higher after trade deal — The consensus is for today’s Jan Markit U.S. manufacturing PMI to be unchanged at 52.4 following December’s report of -0.2 to 52.4. The consensus is for today’s Jan Markit U.S. services PMI to show a small +0.2 point rise to 53.0, adding to Dec’s recovery of +1.2 points to 52.8. The markets will be watching to see if there is an improvement in business confidence in January following the US/China trade deal that was announced on Dec 13.
