Global Daily – A week of political event risk

by: Bill Diviney , Nick Kounis

US & UK Politics: China talks, shutdown talks, and another Brexit vote – It is a week of political event risk in the US and – to a lesser extent – the UK this week. In all cases, the path of least resistance looks to be more can-kicking rather than any breakthroughs (or breakdowns) happening. First, US Trade Representative Lighthizer and Treasury Secretary Mnuchin will be in Beijing for a crucial week of US-China trade talks. With the 1 March deadline looming for the implementation of new tariffs, it looks more likely there will be an extension to this deadline than a comprehensive agreement being wrapped up beforehand – though we would not necessarily get confirmation of an extension this week. Secondly, talks between Democrats and Republicans to avert another shutdown – which would happen on Friday without any agreement – appeared to stall over the weekend. We think that in the absence of an agreement over border security, another stop-gap funding bill is more likely than another shutdown, however. President Trump was weakened by the last shutdown, with polling showing most voters blaming him for the impasse, while his approval ratings have fallen c.5 points over the past month to the lowest levels in a year (the latest poll of polls from 24 January – 8 February stands at -12.2, but it has been as low as -14.8).

Finally, there will be another Brexit debate and vote this week in the UK Parliament, on Thursday 14 February. Prime Minister May will make a statement tomorrow, where she is expected to update MPs on the progress in the attempted renegotiation of her Brexit deal. MPs will subsequently debate the issue and once again be able to vote on amendments on Thursday that could (for instance) require the government to seek an extension to the Article 50 deadline, or potentially to seek a softer Brexit (eg. one involving a permanent customs union, as the opposition Labour Party favours). While most of the opposition will likely continue to vote in favour of such amendments, the passage of them looks unlikely, as it appears PM May’s own MPs will give her the benefit of the doubt for the time being – likely until the next key vote, due by 27 February at the latest. (Bill Diviney)

ECB View: TLTRO on the cards but may come later – Over the last few months, an extension of the current TLTRO programme has been part of our base case for the ECB. This is mainly based on the view that commercial banks – especially in Italy and to a lesser extent Spain – will find it difficult to fully refinance the TLTRO funds in private sector debt markets. Indeed, more generally, given the sharp slowdown in eurozone economic growth, the prospect of shrinking excess liquidity (which would occur from June 2020) also seems less desirable, and if anything the prospect of a fresh TLTRO has become more likely in our view, as the ECB seeks to keep financial conditions from tightening. However, recent commentary from the ECB suggests that an announcement may take some time to materialise. For instance, at last month’s press conference, ECB President said in a question about the TLTRO that ‘several speakers actually raised this issue but no decision was taken because we didn’t discuss policies this time.’ As such, he refrained from signalling any kind of decision already at the March Governing Council meeting. ECB Vice President Luis de Guindos confirmed in comments today that the issue had not been discussed saying it was something the central bank would analyse in the ‘coming months’. As such, a June decision on TLTRO looks more likely now than a March announcement. (Nick Kounis)