With measurement issues regarding the size of one global leader’s nuclear button being larger than another among a wide raft of popular concerns in the media, investors don’t seem to care much. The US stock market plowed through 25,000 and…
With measurement issues regarding the size of one global leader’s nuclear button being larger than another among a wide raft of popular concerns in the media, investors don’t seem to care much. The US stock market plowed through 25,000 and continues to hit new highs despite constant worries about geopolitical risks ranging from North Korea, to Iran, to the USA itself.
A recent HSBC online survey of its clients show a relative lack of concern regarding the jostling in Washington DC and beyond. In its list of top market concerns, readers of HSBC multi-asset research did not include US political instability or its leadership – or any geopolitical concern for that matter – as something they seemed worried about.
Institutional investors surveyed by HSBC – many of them working in the European Union — appear most worried that a deal between the United Kingdom and the Eurozone regarding “Brexit” might not cross the finish line.
Negotiations stalled over several issues, including the large “exit fee” that is being charged by the EU. If the UK doesn’t agree to EU demands, they could be shut out of that market, their largest trading partner.
Mark McDonald, head of quantitative currency strategy at HSBC, sees several paths forward, with the worst case being a “no deal.” Under this situation, the UK simply leaves the EU without any exit payment or debt obligation, in which case the EU is likely to cut off trade. While this might not occur until March 29,2019, the formal end date for the Article 50 negotiation period, the trade impact and related currency market concerns would be apparent well before the deadline.
“The single biggest and most obvious economic impact of ‘no deal’ would likely be on trade,” HSBC noted, pointing to the potential for run-away inflation. EU trade tariffs might add 10% to 15% to the cost of goods sold by the UK, and there could also be consumer price increases as well, particularly on UK food imports, as HSBC points out:
If such a worst case were to occur, HSBC thinks the “cable spread” between the UK and US currency could fall to 1.10. “We do not believe that the FX market is pricing in that significant a chance of “no deal”, despite our survey respondents telling us that it is a key concern,” the report noted. The GBP-USD spread already appears impacted, as its historical correlation with short term sovereign interest rates is diverging to its widest level in years.
The UK, meanwhile, has been reported to be stirring the pot by reviving the Trans Pacific Partnership with the island nation as a key economic driver, replacing the US.
Other concerns on the HSBC list include a US dollar funding squeeze and a Chinese credit crisis, which the report categorized as having “the potential to be much bigger events for global financial markets than a no-deal Brexit.”
Those arguing that Brexit have voiced concern it might set an example for other indebted nations to exit the EU without paying their debts, leading to a collapse of the system. Chinese leverage has been a concern expressed by numerous hedge fund managers, as has rising interest rates and central bank policy mistakes, all of which appeared low on HSBC’s list of concerns.
