Rabo: While Everyone Is Handing Out Stimulus To Prop Up Demand; China Has Been Propping Up Supply

By Michael Every of Rabobank

So Long, and Thanks For All the Fish

In a crowded field of political and geopolitical head-scratching moments, and on a glide path to goodness knows where, the UK is doing its best to make sure it stays competitive. No, not the ‘PM’s special advisor deciding to drive to a castle with his family under lockdown to test his eyesight’. Nor the Sky TV interview where the anchor asks Health Secretary Matt Hancock why the government had just appointed ex-Australian PM Tony Abbot as its trade ambassador given “he’s a homophobe and he’s a misogynist,” and Hancock –wearing an LGBTQ rainbow flag pin—replies: “Well, ah, he’s also an expert on trade.” Both are on the list though: who needs to watch political black comedy ‘In the Thick of It’?

Specifically, the British have laid down a 15 October hard deadline to agree a new deal with the EU; and yet this week the government is set to introduce legislation that will unilaterally break the terms of the current Withdrawal Agreement over state aid and Northern Ireland That, while calling No Deal still a “good outcome”. Hard ball it is then.

Indeed, while the EU has taken a very tough approach of its own (e.g., the UK must keep aligning itself with EU regulations, or the EU get a say in them; and if the UK insists on keeping all its own fish then the EU won’t buy them), the UK is also upping the ante. The Daily Express —where one goes to drink deep of Brexit thinking once considered unthinkable yet now as common as H20— reports the UK is considering punishing the EU for no deal by refusing to allow EU corporations to raise funds in The City; which is what will happen in a No Deal anyway.

An opinion poll over the weekend shows 50% of Brits asked believe all those fish (which they don’t really eat) and the setting of their own laws (which nobody really follows) are red lines that they will not be willing to compromise over: that matters, politically, even with an election years away. Indeed, UK Brexit Negotiator Frost has stated that this week is crucial to determining if a deal can be struck at all; yet the Express states preparation for a no deal has been ramped up with the “brightest and best” civil servants brought into a new Transition Hub. Indeed, they quote a senior Downing Street source that the UK has been “resigned to Australia rules for some time” as the probable outcome. Suddenly one starts to see where Tony Abbot’s expertise may come in: presumably he’s still in Oz, and knows all the right people in all the right pubs that the Brits will need to buy all the right drinks for in order to try to shift UK trade back towards Oz again, effectively doing an ‘inverse 1973’. Which is also handy for an Australia looking to diversify from China, of course.

Regardless, it’s not a news backdrop that suggests GBP has much further to climb near term.

And on the EUR side, the focus will obviously be on the same backdrop, one would think, and also the ECB on Thursday. There, the expectation is that nothing will happen but it will be wrapped up in just the right amount of hints of something that the incessant and unwarranted, and unwanted, appreciation of EUR will cease. Of course, this depends on the verbal finesse of Christine Lagarde. One might want to have a stiff drink at hand this week for another reason then.

But back to trade diversification. The last few days have seen significant signs that Europe might be ‘getting it’ in regards to the new global geopolitical landscape. Both a German government report and the EU’s Borrell have made clear they do not want to be forced to side with either the US or China in the event of a decoupling, and that they need to rapidly diversify trade relations to ensure they have the luxury of choice. That’s also negative for EUR, as transitions are painful. First on the export side, and second if it means less Chinese investment going forwards.

Meanwhile, even the Nordstream 2 gas pipeline, on which Germany has staked its energy future, is now being floated as something that can be simply frozen at the very last minute – which would at least avoid a row with the US ahead. The message again, however, is that the EU has made some exceptionally poor geostrategic choices –by refusing to recognize it needs to think geostrategically– and rectifying them is going to be expensive, slow, and not good for EUR. By all means, allow the market to think that the ECB this week is really the driver, but there is more going on here than just technocrat technobabble.

Yet staying with trade, Chinese data today showed another surge in exports (up 9.5% y/y in USD terms) and yet imports fell again (-2.1% y/y). That’s even though China’s economy is apparently back and nobody else’s is. Yet of course that’s not true: everyone else has been handing out stimulus to prop up demand; China has been doing it to prop up supply. And here we see why such stimulus won’t look like that going forwards without being ring-fenced.

Also worth noting is that even with imports down y/y, China is still hoovering up commodities, from oil to…well, fish.

Is this just because these things are now cheap? Or because there is a recognition that the current global state of affairs is going to lead towards everyone stimulating behind a protective wall, in which case history suggests it’s very useful to have stockpiled everything you might need in a pinch? Let those who ‘don’t do geopolitics’ say the former and good luck to them; and let those who do recognize the very fat tail-risks implied.

Hence “So long, and thanks for all the fish” has multiple possible interpretations. On which note, here are the lyrics to the song from the book of the same name:

“So long and thanks for all the fish; So sad that it should come to this

We tried to warn you all but oh dear!

You may not share our intellect; Which might explain your disrespect;

For all the natural wonders that grow around you

So long, so long and thanks for all the fish

The world’s about to be destroyed; There’s no point getting all annoyed

Lie back and let the planet dissolve around you

Despite those nets of tuna fleets; We thought that most of you were sweet

Especially tiny tots and your pregnant women

So long, so long, so long, so long, so long; So long, so long, so long, so long, so long

So long, so long and thanks for all the fish

If I had just one last wish; I would like a tasty fish

If we could just change one thing; We would all have learned to sing

Come one and all; Man and mammal; side by side, in life’s great gene pool.”