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Christopher Wood christopher.wood@clsa.com +852 2600 8516<br />
GREED & fear has been in London this week when meant to be in America because a once<br />
distinguished airline managed to lose GREED & fear’s passport during a pre-boarding security check<br />
between the boarding gate and the plane. Be it a pure cock up or identity theft, the result has been<br />
an ongoing administrative nightmare.<br />
Still the longer than planned tenure in Londinium has had the benefit of allowing GREED & fear to<br />
monitor closer at hand what is undoubtedly the biggest cock up in post-1945 British politics. That is<br />
Cock up Cameron’s decision to call in June 2016 a referendum on “Brexit”, an error compounded by<br />
his precipitous decision to resign a matter of hours after the result was announced, thereby<br />
precipitating a civil war in the Conservative Party, a conflict which continues to this day. Such a<br />
“wobbly” is not worthy of a product of GREED & fear’s alma mater. And GREED & fear, unlike most<br />
people, still believes in that formerly celebrated British virtue, the stiff upper lip.<br />
As for the Brexit issue itself, GREED & fear does not have strong views save to say that the<br />
referendum should never have been called. But it is clear that the “deal” negotiated by the hapless<br />
Madam May will satisfy no one since Britain will remain a “rule-taker” from the EU without the<br />
benefits of membership. For this reason it is likely not to pass through parliament, and under<br />
Britain’s unwritten constitution, parliament is sovereign. The question will then become whether<br />
Madam May will agree to a second referendum or be forced to call a general election. So far, the<br />
increasingly confident Labour leader Jeremy Corbyn is, sensibly from his own political perspective,<br />
keeping his options open. Meanwhile, GREED & fear has to admit admiration for the slick negotiating<br />
tactics of the EU’s chief Brexit negotiator Michel Barnier.<br />
From a financial market standpoint, while the outcome of Brexit is clearly very important for Britain,<br />
it remains a sideshow for the Eurozone. Indeed, GREED & fear’s base case remains that the Brexit<br />
debate will be rendered irrelevant by developments in the rest of Europe and most particularly in<br />
Italy. Either the Eurozone moves more explicitly to fiscal integration, as advocated by French<br />
President Emmanuel Macron, or it is only a matter of time before Italy walks out. Britain would<br />
never sign up to fiscal union and so there would be a natural parting of the ways if the Macron<br />
agenda is happened, which is why the Brexit was unnecessary. Meanwhile, if the Macron agenda<br />
continues to be resisted by Germany, then the breakup of the Eurozone will come sooner or later<br />
anyway. But Britain would be saved the real pain precisely because, thanks to the late and great<br />
Margaret Thatcher, it is not part of the euro.<br />
Figure 21<br />
Italian 10-year government bond yield and spread over 10-year bund yield<br />
8<br />
7<br />
6<br />
5<br />
4<br />
3<br />
2<br />
(%) (bp)<br />
Italian 10-year government bond yield<br />
Spread over 10Y German bund yield (RHS)<br />
600<br />
500<br />
400<br />
300<br />
200<br />
100<br />
1<br />
0<br />
Jan 11<br />
May 11<br />
Sep 11<br />
Jan 12<br />
May 12<br />
Sep 12<br />
Jan 13<br />
May 13<br />
Sep 13<br />
Jan 14<br />
May 14<br />
Sep 14<br />
Jan 15<br />
May 15<br />
Sep 15<br />
Jan 16<br />
May 16<br />
Sep 16<br />
Jan 17<br />
May 17<br />
Sep 17<br />
Jan 18<br />
May 18<br />
Sep 18<br />
Source: CLSA, Bloomberg<br />
Thursday, 22 November 2018 Page 11
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