Tilney | Market Pulse November 2018





Tilney Group’s Chief Investment Officer Chris Godding discusses the macroeconomic ideas and research from November 2018.


The next Brexit hurdle


The mid-December vote on Theresa May’s Brexit proposal is the next hurdle for the Prime Minister, who has delivered remarkable energy to an unremarkable deal. Both the Remain and Leave camps object to the conditionality that has the potential to leave the UK in the upside-down world of being neither in nor out of the European Union indefinitely.

While the deal is unlikely to pass through Parliament without amendment, we do expect that the fear of a no-deal exit will be enough to win the day, providing relief for both business leaders and consumers. Apart from hope in the UK camp, the motivation for the EU to focus on a free trade deal with the UK after 29 March 2019 is, at this point, far from clear. As Rudy Giuliani once said, “change is not a destination and hope is not a strategy”.


Provocative budget from the Italian Government

In addition to troublesome Brits, the European Commission has had to deal with a provocative budget from the Italian Government, submitted by the unlikely alliance of Luigi Di Maio and Matteo Salvini.


The initial proposal to target a budget deficit of 2.4% when expected GDP growth is optimistically forecast to be 1.5%, creates an interesting dilemma for the technocrats as it would not normally be acceptable under the rules of the Financial Stability Pact. The European Parliament elections are in May next year and, according to Gavekal Research, a tough approach regarding the Italian budget improves the odds that Salvini’s Northern League populists will win enough votes to be able to disrupt the status quo in Brussels and Strasbourg.


After the election, it is likely that the coalition will look to compromise on the budget conditions quickly in order to secure the external funds that will be required to finance the €340 billion of debt that is scheduled to be issued or rolled over next year. The European Central Bank is cutting its bond buying programme next year and, without agreement on the budget, Italian Government debt (BTP) yields will continue to rise to a level that will threaten the very foundation of the Italian banking system.


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