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Sterling torment; China's opportunity in volatility

Sterling in torment

By Vincent-Frédéric Mivelaz

Currently trading at 0.85370, EUR/GBP is valued at a 22-month low, heading along 0.85510 short-term. Parliament is expected to start another Brexit vote at 17:00 GMT. The battle between to impose a negotiated Withdrawal Agreement continues. Time is running short: an extension of negotiations would need to be approved by the European Union during its summit next Thursday. An extension until 30 June 2019 might be agreed. We question whether Prime Minister Theresa May’s Withdrawal Agreement or any alternatives are even feasible. GBP-positive scenarios are either an acceptance of the existing Withdrawal Agreement or of an extension.

Two days of intense debates were capped yesterday in defeat for the government. UK Attorney General Geoffrey Cox warned that the country could remain stuck in the bloc’s customs union. Last night Parliament voted not to allow a hard Brexit – but this was non-binding. Lawmakers will be focused on extending the divorce period, accepting May’s deal or staying in the EU.

 

China volatility creates opportunity

By Peter Rosenstreich

The Chinese economy continues to suffer under US tariffs and slower domestic demand, despite efforts by policy makers to provide economic stimulus. Factory output rose 5.3% annually but declined 0.4% from December. This is the weakest reading since 1995. Chinese exports fell 21% in February from a year earlier. The stock market suffered deep decline in 2018 (CSI 300 Index down -26%). Yet these revaluations created a unique situation. Chinese stocks are up 27.8% this year through 5 March.

The MSCI Indexes will increase weighting of China-A shares for 5% to 20% by yearend. This will push USD 67 billion of investment into mainland China equities. Historically China stocks have been driven by retail investors, due to information gaps and liquidity issues.  Now they are attracting institutional investors hungry to get a piece of the world’s second largest economy. The yuan has gained widely on expectations for a US-China deal: it should stabilize USD/CNY around 6.7 or even higher. U.S. Trade Representative Robert Lighthizer indicated that negotiations are in their final weeks. The positive effect on China stocks will be profound.

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