Anthony Willis, investment manager in the Multi-Manager team at BMO Global Asset Management gives his views on the week 25 February to 1 March 2019.

There has been plenty of news on Brexit, though nothing to actually give us any certainty. The week began with Prime Minister Theresa May announcing a delay to the final vote on the EU withdrawal agreement to a new deadline of March 12, only 17 days before the legal Brexit date. This meant that the votes that took place in Parliament during this week took on less significance, though there were some big policy shifts in both the government and the Labour Party. Following discussions in the Cabinet on Tuesday, the Prime Minister addressed Parliament and confirmed that an extension to Article 50 is now an option and will be voted on in Parliament in March should the government be unsuccessful in securing Parliamentary approval for whatever revised deal the Prime Minister is able to come up with as a result of the ongoing negotiations with the EU. From the EU side, Donald Tusk called on the Prime Minister to “take the rational step” of requesting a Brexit extension to avoid a “chaotic exit” from the EU on the 29th of March. Having met the Prime Minister earlier in the week, Tusk said a delay would make sense because “it is clear that there is no majority for the withdrawal deal in the House of Commons”. The Prime Minister also met Jean-Claude Juncker; both promised to conclude UK/EU negotiations before the European Council summit on the 21st of March.

At the time of writing, the timetable now looks like this: there will now be two weeks of negotiation time with the EU, after which a revised deal will be put to Parliament by March 12. Should this deal be rejected, the next day will see a vote on a no-deal Brexit, which is likely to be rejected. If that is the case, a vote will be held the next day on extending Article 50. Of course, an extension to Article 50 could be for a short period (as proposed by the government) or potentially for much longer, as the EU seems to be suggesting. A significant delay to Brexit may well focus the minds of Brexiteers: if this extension is for a significant period of time, it may well reduce the likelihood of any form of Brexit taking place given the possibility of a general election or a re-run of the referendum with voters arguably more informed about the consequences of their vote, leading to a reversal of the 2016 referendum result. The Prime Minister's actions this week have solved for now a likely split in the Cabinet as significant resignations were expected to allow ministers to vote against a no-deal Brexit. However, there is still much to be done between now and the middle of March.

The Labour Party also saw a significant shift in policy following the defeat of their own amendment this week in Parliament to avoid a no-deal Brexit and tie the UK into a customs union with the EU. Party policy is now to seek a second referendum and they will put this proposal forward during the votes in mid-March.

So how does this week’s news impact the likely outcomes? It does appear that, for now, a no-deal Brexit is less likely. This was reflected in some sharp moves higher for sterling against the US dollar and the euro. However, it still remains unclear if the government will be able to get anywhere near a majority on what will ostensibly be the same deal that was defeated in January by a huge margin. If the government does succeed, then we will exit the EU on 29 March into the transition period under the Prime Minister’s deal. If not, then a no-deal is likely to be ruled out by Parliament. There seems to be no Commons majority for a second referendum for the moment, so in the short term, an extension of Article 50 and a lot more uncertainty seems most likely.

Onto politics elsewhere: the US has indeed confirmed an extension to the 1 March deadline for imposing additional tariffs on $200 billion worth of Chinese exports to the US. President Trump noted “substantial progress” as the latest round of trade talks between the US and China concluded last weekend and said he planned to meet Chinese President Xi at some point next month. US trade representative Robert Lighthizer also noted the progress being made but added that the US continues to push for “significant structural changes to allow for a more level playing field” and that “the issues between the sides are too serious to be resolved with promises of additional purchase”. It does seem that the US trade team is arguably more hawkish than their President, and Trump will look to conclude a deal in the coming weeks – even if it does not have a great deal of substance to it. From a market perspective, any deal and the de-escalation of trade tensions would be most welcome though of course the concern remains that Trump will turn his focus to the ‘national security’ issues surrounding auto imports from Japan and Europe.

President Trump met with North Korean president Kim Jong-un in Vietnam, and whilst the White House reported that “very good and constructive meetings took place”, no actual progress was made. North Korea may have gone too far in asking for sanctions relief, whilst the US pushed for denuclearisation before any moves are made on cutting sanctions. The resulting stalemate saw a sell-off in South Korean equities, but as long as both sides continue to declare their intent to keep talking, and North Korea continues to abstain from nuclear testing, this should not pose too many problems for wider risk appetite.

Whilst Trump was busy in Vietnam, back in Washington his former personal lawyer, Michael Cohen, already convicted of perjury and soon to begin a prison sentence, testified to Congress over his work for Trump for over a decade leading up to and including the Presidential campaign. His testimony hinted at financial crimes and campaign finance violations, though it is worth bearing in mind that a sitting President cannot be indicted over such matters. If nothing else, this reminds us that when the Mueller investigation concludes, any negative consequences for the President will also be felt in markets given that Trump’s policies have at least in part been responsible for the strong run in US equities.

Moving onto economic data, fourth-quarter growth data for the US showed the economy growing at an annualised pace of 2.6 percent, slower than in the third quarter but ahead of consensus expectations. Brazil’s struggle to escape from a deep recession was highlighted by weak growth in the fourth quarter of only 0.1 percent, leaving the economy 1.1 percent bigger than the final quarter of 2017.

PMI data for February showed continued signs of slowdown, with both China and Japan in ‘contraction’ territory – the third month in a row for China, and the first in almost three years for Japan. Eurozone PMI data was confirmed as entering ‘contraction’, dragged lower in the main by continued weakness in Germany and Italy, along with new weakness from Spain. France saw slightly stronger numbers. UK data slipped slightly from January in line with expectations but remains just into positive territory. The data for the US, to be published this afternoon, is expected to weaken but remain significantly stronger than other developed markets.

Elsewhere, Indian growth for the final quarter of 2018 fell to 6.6 percent, lower than expected. The government of Narendra Modi is already taking steps to both boost economic growth and their chances in national elections through various reforms, along with direct payments to farmers and tax cuts for the middle classes. India has also been in the news regarding rising tensions with Pakistan following a militant attack in Kashmir that killed at least 40 Indian troops – this week saw India retaliate with airstrikes on ‘terrorist camps’ in Pakistan, which was followed by the shooting down of an Indian air force jet and the capturing of the pilot. This appears to be the worst escalation in tensions between the two countries since they early 1970s, though the language from both sides now appears to be moving to calm the situation before it escalates further.

We are still in a holding pattern awaiting some certainty, and that now seems to be reflected in the fading market momentum. Any breakthrough on trade talks should see some further upside in markets in the short term at least. Likewise, UK assets, particularly sterling, are starting to price in a little more certainty on the Brexit process, at least in the sense of ‘no deal’ being less likely. Our positioning remains relatively cautious and we are still of the mind to take profits rather than add to portfolios, not least given the strong run in equities since the start of the year, despite worsening economic and corporate fundamentals. In terms of our regional allocations, we continue to favour Asian and the emerging markets. Closer to home, we have added a little to our UK holdings at the expense of European funds. We continue to be slightly underweight the US and the move this week takes us further underweight Europe and slightly above neutral in the UK. Overall, we continue to be underweight in both equities and in fixed income, with higher allocations to cash and absolute return type funds. For now, we think that some patience is required; more certainty is coming on some key themes but we remain concerned that slowing global growth will feed through to impact on risk appetite at some point.

BMO GAM is a global investment manager with offices in more than 25 cities in 14 countries.