Focus: Eurozone industry, European Council meeting on Brexit

Will industrial production stabilize in August?

This week, data on industrial production in August from individual Eurozone countries was released (aggregated data for the Eurozone is expected next week). With a slight increase in August (+0.3%) compared to July, Germany's industrial production has stabilized for the time being. Based on the data already available on Germany's automobile production in September (which shows a substantial increase), the signs for a further slight increase in Germany's industrial production in September are quite good. In France (down) and Italy (up), industrial production developed differently in August.

Based on the figures available so far, we expect a slight increase in industrial production in the Eurozone in August, following a 0.4% decline in July. As a result, the downward pressure exerted by industry on the Eurozone economy should ease somewhat in 3Q19. The latest data on German automobile production in September is an encouraging indication, although we expect setbacks due to the threat of a hard Brexit at the end of October (our core scenario). In our view, the economic outlook can only brighten once the Brexit question has been resolved and the trade dispute between the US and China has eased a bit. The current trade talks between the two countries are therefore of particular importance.

European Council could offer Brexit delay

Next week, on Thursday and Friday, the next meeting of the European Council will take place. Although there are three items on the agenda (Strategic Agenda, Climate), Brexit will be the focus of interest. A negotiated solution by then is very hard for us to imagine, especially as negotiations are currently not taking place at all, with the parties only holding talks. The outcome of the summit is, of course, open. The most likely outcome for us is that the heads of government will signal their willingness to postpone the Brexit date under certain conditions simply to avoid being blamed for the UK's unregulated departure. On Saturday, the British Parliament will meet in a special session. The Benn Act obliges the British prime minister to apply to the EU for an extension of the withdrawal period if the British Parliament has not agreed either to a negotiated solution or to a withdrawal by October, 19. This would actually clear the way for an extension of the deadline. On one hand, there is a British PM who is obliged to apply for it. On the other hand, there is an EU that is prepared to grant an extension. From our point of view, however, a hard Brexit on October 31 remains the most likely scenario. This is because Boris Johnson has committed himself to this date and any deviation from it would greatly reduce his chances of success in the very likely forthcoming new elections. So, he will do everything he can to deliver, and from our point of view, his chances are good.

However, most of the markets are currently expecting the exit date to be postponed. At least, that is what we can read from the current valuation levels. The risk that volatility will pick up in the coming weeks and at least temporarily secure investments will benefit, while riskier investments and the euro will come under pressure, is therefore considerable.

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