The fall-out of a Crash Brexit

The latest encouraging signals from Brexit negotiations support our base case of an orderly EU departure of the UK. Risks of a no-deal divorce remain non-negligible, though, especially when it comes to UK parliament ratification.

Highlights:

  • The latest encouraging signals from Brexit negotiations support our base case of an orderly EU departure of the UK. Risks of a no-deal divorce remain non-negligible, though, especially when it comes to UK parliament ratification.
  • In this risk case, the UK would fall into recession, while euro area growth would fall below potential. Barring policy responses, GDP would be down by 4.2 pp in the UK and 0.9 pp in the euro area by end-2020 vs an orderly Brexit.
  • The BoE may ease again, though Carney has warned that this time around rising inflation would be hard to ignore. The ECB would postpone its first key rate hike to end-2020.
  • The gloomier economic outlook and risk-off mode would induce a drop in Gilt yields and a bull-flattening of the Bund yield curve. Spreads on credit and Southern European sovereign debt would widen.
  • Rising uncertainty would drive equity risk premiums higher causing share prices to drop sharply. The British pound would slide, with the EUR/GPB likely reaching parity, while the USD would strengthen.

Read the full publication below.

CHINA’S Q4 GDP GROWTH SURPRISED ON THE UPSIDE, BUT RISKS TO THE OUTLOOK HAVE INCREASED

RELATED INSIGHTS

CHINA’S Q4 GDP GROWTH SURPRISED ON THE UPSIDE, BUT RISKS TO THE OUTLOOK HAVE INCREASED
This morning, China published its Q4 GDP growth alongside with December monthly activity data. Q4 growth accelerated to 6.5% yoy which lifted total 2020 GDP to 2.3%. December real activity data were more mixed. While exports came in strongly, important domestic demand components were a bit unsteady.
COVID-19 FACTS & FIGURES
US President-elect Joe Biden has unveiled a $1.9 trillion stimulus package proposal. Following the recent increase in cases, China has imposed new restrictions and lockdowns in the Hebei province. Canada has implemented new restrictions and a provincewide curfew in Quebec that will last until February 8. German Chancellor Angela Merkel warned that the recent rise in Covid-19 cases could force the country to prolong the nationwide lockdown until April.
EQUITIES: STAY POSITIVE WITH A VALUE-CYCLICAL TILT
Following a monster rally in stocks last autumn, multiples are well above historical averages, but equity investors can count on lingering low yields, tighter credit spreads and increasing central banks’ balance sheets which in turn maintain low the cost of equity and the discount rate of future cash flows.