By Michael Every of Rabobank
Bangers and Mash
It’s the depths of Northern hemisphere summer, and markets are appropriately ‘summery’: when one sends an email, one sometimes expects to hear an echo. Sadly, however, the real world does not stop. Which actually brings us to a British summer-time BBQ favorite – sausages.
They say that if one wants to appreciate both sausages and law, one should never watch either being made. Unfortunately, right now we have to watch the latter in the US, as the Biden infrastructure push continues, even as roads don’t look like they are being built to the necessary 10 Republican votes. Moreover, we get to watch both sausages *and* legislation coincide in the UK – and it is likely to turn market stomachs when they get back from the beach.
Yesterday, the UK government announced it intends to re-write the Northern Ireland Protocol agreed with the EU as part of the Brexit deal, releasing a 28-page report detailing how it wishes to proceed. This comes in response to UK retailers reporting British consumers in Northern Ireland face a narrower selection of goods and higher prices compared to the mainland; and that despite “Byzantine, pointless, pettifogging bureaucracy”, 40% of sausages and chilled meat shipments are being rejected even if the paperwork is adhered to.
The UK states it will not use its right to trigger Article 16 to end the Protocol, and that it is “not over-prescriptive about solutions”. It suggests a compromise such as UK exporters declaring sausages are intended for Northern Irish, not Irish shops, and a dual EU/UK regulatory regime. The EU’s instant response, as the UK knew it would be, was “Non – and fill in the all the documents in black not blue pen, or les saucisses go in la poubelle”. As a reliably anti-EU Daily Mail op-ed rumbles: “I’m afraid I see trouble ahead: ructions in Northern Ireland, the EU and the UK at loggerheads, and President Biden ignorantly lambasting America’s closest ally” – the latter point in reference to Biden’s known support for Irish position. In short, Brexit still isn’t done, despite markets, like PM Johnson, having tried to put it behind them. We still don’t know what the final economic, and even geopolitical, geography will look like.
Perhaps covering this mess up slightly for now, besides a rare heatwave, is the fact *all* UK supermarket shelves are running empty in places due to a ‘pingdemic’: the Covid track and trace scheme that was needed back in early 2020 is now belatedly working, and up to 1.7m workers are at home in quarantine after being told they might live next door to someone who has tested positive. And if that isn’t the cause, it’s the global supply-chain snarl with no end in sight.
Yet zooming out from black vs. blue pens to red dashed lines, the UK just announced its two new aircraft carriers will be based in Japan from now on, with the first due to arrive in September. Think about that for a moment. Two vastly-expensive pieces of military equipment, full of US-made F-35s, and British sailors and sausages, kept on the other side of the world. It says a huge amount about the UK’s intentions to go global in at least one dimension – alongside the Quad. Expect new trade architecture to eventually flow as a quid pro quo, or else the UK isn’t doing diplomacy right. (And that is admittedly a real possibility with the current UK bridge crew, as we see with Northern Ireland.)
But back to Europe’s exciting phytosanitary standards. Today ECB President Lagarde will also present a new “strategic framework” – without mention of either aircraft carriers or sausages. (Although those who can join enough dots may see an implied reference for the need for a more geostrategic EU view of where the green inputs for the ECB’s certain-to-be-touted green transition are going to be sourced from.) Our ECB watchers believe the Bank’s new framework should not lead to immediate changes in the policy stance. However, the format of its meeting’s proceedings will be updated, which may lead to a slightly more dovish forward guidance, particularly on policy rates, to indicate that the ECB will persist in its monetary accommodation – and there is a small risk of more significant dovish changes to the guidance, including a potential formal indication of a transition phase to (higher) asset purchases after PEPP ends. One can easily imagine Lagarde never raising rates during her 8 years in office, just as Draghi never did.
Perhaps we should add central banks to the list of things one should never look too closely at if one wants to continue to appreciate them?
Meanwhile, market media has instead been focusing on what two billionaires had to say about Bitcoin – as if that matters when the regulators are flexing their muscles. At least they weren’t boring us with their holiday photos from space. They may want to fit that billionaire day-trip in soon though, because back in the sausage-making world of legislation/regulation, this week has seen a key appointment by President Biden - Jonathan Kanter as assistant attorney general for antitrust. This is a very strong signal, alongside Lina Khan at the FTC, that the recent Biden antitrust executive order means business. In short, it may be hard for a president to put things up, as the infrastructure deal deadlock shows, but with the right team of lawyers, it is quite possible to pull things down and break things up.
Apparently, Big Tech firms are already hiring away lawyers from the FTC to ensure the latter is under-staffed, and that they are well-versed in their opponents’ thinking. Except they won’t be. Tech titans will be hiring ‘Yes, aiming for a global monopoly is naturally good for consumers’ Borkians; and the new government brooms will logically hire younger Brandeisian firebrands who see monopolies and cartels as bad – I know, shocking, right? Expect market fireworks --and an explosion of lobbying-- when they work this out.
But for now all the above bangers remain on the grill. (Until, in traditional British fashion, they are served blackened on the outside and worryingly pink in the middle, with a garnish of unexpected rain – to equally-sozzled consumers who therefore don’t notice). That leaves us with a market mash of low-conviction random walks across asset-classes.