Pushing back deadlines...

Is it also called "procrastination"? I don't know.

The short term scenario on markets is somewhat directionless after a strong January and is awash with self-imposed deadlines on many negotiations that could rattle it.

Setting up a deadline is the first rule of most negotiation handbooks. I'm afraid I have to disagree, I find it can backfire and give the party willing to maintain the status quo the upper hand.

US-China trade agreement. The timeframe for the negotiations is supposed to expire on March 1st. This date looked tight from day one as structural changes in the agreements have to be negotiated, and this will require time. Trump seems more constructive in his negotiations lately and is considering pushing back by 60 days this deadline for solving the issues with China. If nothing is agreed on March 1, the crisis risks to escalate as the value of Chinese goods impacted by tariff could reach 500 USD bn over an unspecified period.

In the short term, the equity market will react dumbly to the news. No agreement = risk off, compromise or procrastination = risk on. However, in the longer term, the US is likely to win anyway, as globalisation is taking a new path, where technological innovation is more important than cheap workforce, and the emerging markets are consuming 50% of the production. So don't expect millions of jobs created by this new wave of globalisation but expect IP to come back to the centre of the scene.

Brexit. To follow the Brexit saga has become something in between following a celebrity's divorce on tabloids and football match on television. In both cases, bored detachment has become the dominant attitude. "Revolt", "apocalyptic", votes on obscure amendments, new referendum, "no deal", "postponement of article 50". We are all familiar with these terms and definitions now, but in reality we are not allowed to know what is going on. It is evident that, like in any negotiation, there is a final objective aimed by the parties and great uncertainty about the path that will be followed, but there is a general feeling that it will be reached. It is also evident that none of the parties has any interest in reaching a final agreement before the 11th hour.

At the moment, it looks like there are more contingency plans (most of them rather ridiculous) than central plans, but all will seem more evident in few weeks, most likely it will be "procrastination" even in this case.

The main risk short term is what I call "the meteorite risk" or Taleb's Black Swan. Something unexpected that everybody should have seen and everybody neglected to care for. The solution to this would be "the skin in the game" to put it in Nassim Taleb words. At the moment none of the parties seems to have it. We are therefore reducing our directional bets in most UK assets (Cable, EurGBP mostly) while keeping some relative exposure to UKX/SXXP as we think most risks are priced in. As for US Equities while we are still bullish on both levels and the economy, we are gradually building up our hedges again, be it futures on the S&P or gold.

Longer term we all know that the global economy will have a very different and new face in the future and that's the main reason we remain "constantly curious".

Please do not hesitate to contact one of our specialists for further discussions or me.

Best regards

Federico Polese

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