Theresa May’s resignation, trade war USA-China, European Elections

Markets still taking cover

As the week draws to a close, events in the United Kingdom have turned upside down. At the end of last week, negotiations between the Conservatives (Tories) and the Labor Party over an EU exit procedure broke apart. The following weekend, Theresa May announced some bold new proposals to push through the withdrawal package. These included giving Parliament the opportunity to vote on a second Brexit referendum. These proposals were largely rejected by both the party itself and the opposition, culminating in the resignation of the minister who would have been responsible for bringing the bill to Parliament. The new vote on the resignation package was subsequently postponed indefinitely from the beginning of June. Today, Theresa May announced her resignation on June 7.

After Theresa May's resignation, the next step is the appointment of a successor. This process should start on June 10 and will probably last at least until the end of July. From the extension of the deadline for an agreement to the end of October, which was granted by the EU, four out of seven months will have passed without any progress having been made in the matter. On the contrary, a new prime minister will probably have to start from scratch, and even under a new prime minister, a package that the British Parliament and EU can agree to seems a long way off. If an uncompromising Brexiteer becomes the new prime minister, such an agreement can almost be ruled out. A solution through a second referendum or early elections seem unlikely from today's perspective. The risks for a hard Brexit have thus increased significantly.

A hard Brexit would worsen the economic outlook for the Eurozone in the third and fourth quarters. The companies would be unsettled and at least for the months after October, the exit date, a clear impairment of the trade would be expected. German government bonds will continue to benefit from the ongoing uncertainty over the UK's final divorce procedure from the EU for the time being. Should a hard Brexit actually occur, this would leave yields at a very low level for some time to come. We will wait for the political events of the coming days and then assess the impact on our forecast from the changed political situation.

The second big issue in the markets is the trade war between China and the US. Negotiations are currently at a standstill. The conflict was recently fueled by the US government's decision to blacklist Huawei and thus prohibit US companies from doing business with Huawei. The trade conflict thus shows no signs of easing.

From our point of view, however, an agreement over the coming months remains the most likely scenario. The escalation of the conflict since early May, when US President Trump announced an increase in tariffs and promised additional tariffs, has increased the risks to the US economy. Experience has shown that the resulting volatility on the stock markets alone has a direct negative impact on overall economic demand. If raised tariffs from 10% to 25% to USD 200bn in imports remain and if tariffs are raised for a further USD 300bn, the economy would not only be burdened beyond this, there is also a high probability that inflation will rise noticeably. All this would probably still be felt shortly before the next presidential election in 2020 and this suggests to us that the US side is interested in a settlement of the conflict in the foreseeable future.

EU – Europe elects new parliament

Elections for a new European Parliament will take place from May 23 to 26. So far, the Conservatives and Christian Democrats (about 29% of the seats) and the Social Democrats (about 25% of the seats) dominate the Parliament. Based on current polls, however, both the Conservatives (around 24% of seats) and the Social Democrats (around 21% of seats) must expect significant losses on the coming election day. After Macron's governing party ‘En Marche', which will run in European elections for the first time in 2019, joined the Liberal Alliance, this camp can expect substantial gains (around 14% of seats). According to surveys, Eurosceptic parties can expect gains as well. The question of whether the top candidate of the winning electoral alliance will also become president of the European Commission is still open. Recently, both Macron and Merkel have spoken out against this mode.

For the citizens of Europe, there are clear differences in policy priorities at the regional level. In Scandinavia and Western Europe, climate protection has become the main concern of citizens, whereas for the Portuguese, Spanish and Greeks, the economy is the main concern. In Central and Eastern Europe, migration remains the top concern of citizens. Against this background, it is to be expected that the new EU Commission will focus on these issues. In addition, numerous challenges await the new Commission president, such as the unresolved Brexit issue, the trade dispute with the US, the still open framework agreement with Switzerland and the question of taxation of the digital economy.

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