The British government has capitulated once again in the negotiations over its exit from the European Union. Nonetheless, an agreement may not be within reach all the same. Setback in the process of approving the tax reform in the United States……
OPEC and Russia have announced a nine-month extension of the agreement that places a ceiling on domestic oil production.
In the past few days, sterling has received significant support from rumours that the British government has prepared a much more generous counterproposal to settle its financial commitments towards the EU ahead of its exit from the Union. The counterproposal, which in many ways may be read as a capitulation, comes two weeks before the European Council, which could approve the start of the second phase of the negotiations, as long as sufficient progress is made on the priority issues dealt with in the first phase (in addition to settlement of the divorce bill, the rights of EU citizens legally living in the UK and vice versa, and special accord for the border between the Republic of Ireland and Northern Ireland). However, there is no certainty that an agreement will be reached on the other two points before the European Council meeting: a capitulation of the UK government on the Irish dossier as well would have serious consequences in terms of the resilience of the government coalition, whereas Ireland could veto any agreement that fails to guarantee an open border. Time is playing against the British government: the asymmetry in trade relations implies that the cost of a hard Brexit for the United Kingdom would be disproportionate compared to the consequences faced by the rest of the European Union. With no guarantee of a transition period effectively being decided, businesses operating in the United Kingdom, and the British government itself, will inevitably have to make contingency plans ahead of a potential hard Brexit scenario. Therefore, the British negotiators have already surrendered (1) on the sequence laid out for negotiations, (2) on the fact that the United Kingdom has sizeable financial commitments to settle, (3) on the need of embracing sections of European law into national law, (4) on the need for a transition period during which little would change, initially rejected by Leavers. Ultimately, the agreement will be much in line with the terms upheld by EU negotiators from the start. Also, the United Kingdom will in all likeliness need to postpone most effects of Brexit to well beyond 29 March 2019.
In the United States, the Tax Cuts and Jobs Act (TCJA) has incurred a setback in its approval process in the Senate: discussion of the bill, which should have begun yesterday, has not yet been scheduled. After McCain’s declaration of support for the tax reform bill, the opposition of the fiscal conservatives group has become more problematic, following the publishing of dynamic macroeconomic estimates by the Joint Committee on Taxation (JCT). The JCT argues (not surprisingly) that the reform would not finance itself via stronger economic growth, but would result in a higher cumulated deficit over 10 years by one trillion dollars. The Senate leadership is attempting to draw up safeguard clauses that will reassure the senators concerned about the reform’s impact on the deficit, while a possible change in the corporate tax rate is also being discussed.
OPEC and Russia have announced a nine-month extension of the agreement which places a ceiling on domestic oil production. The new terms will be in place until the end of December 2018. Current cuts in volumes have been confirmed (totalling 1.8 million barrels per day). The biggest positive surprise involves Libya and Nigeria, previously exempt from the cuts, but now subjected to an aggregate ceiling of 2.8 million barrels per day in output. Furthermore, the Joint Ministerial Monitoring Committee, presided over by Saudi Arabia and Russia, will meet every three months to assess respect of the agreement and analyse the evolution of demand and supply fundamentals. If the agreement is largely respected, the global oil market will probably stay balanced in 2018. The main threats will lie in changes to non-standard (shale) production.
The financial analysts who prepared this report, and whose names and roles appear on the first page, certify that: (1) The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures: The analysts who prepared this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.
This research has been prepared by Intesa Sanpaolo S.p.A. and distributed by Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for the contents of this report. Please also note that Intesa Sanpaolo S.p.A. reserves the right to issue this document to its own clients. Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both authorised by the Banca d’Italia, are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.
Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor.
This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. It should not be regarded as a substitute for the exercise of the recipient’s own judgement.
No Intesa Sanpaolo S.p.A. or Banca IMI S.p.A. entities accept any liability whatsoever for any direct, consequential or indirect loss arising from any use of material contained in this report.
This document may only be reproduced or published together with the name of Intesa Sanpaolo S.p.A. and Banca IMI S.p.A.. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. have in place a Joint Conflicts Management Policy for managing effectively the conflicts of interest which might affect the impartiality of all investment research which is held out, or where it is reasonable for the user to rely on the research, as being an impartial assessment of the value or prospects of its subject matter. A copy of this Policy is available to the recipient of this research upon making a written request to the Compliance Officer, Intesa Sanpaolo S.p.A., 90 Queen Street, London EC4N 1SA.
Intesa Sanpaolo S.p.A. has formalised a set of principles and procedures for dealing with conflicts of interest (“Research Policy”). The Research Policy is clearly explained in the relevant section of Banca IMI’s web site (www.bancaimi.com).
Member companies of the Intesa Sanpaolo Group, or their directors and/or representatives and/or employees and/or members of their households, may have a long or short position in any securities mentioned at any time, and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any of the securities from time to time in the open market or otherwise. Intesa Sanpaolo S.p.A. issues and circulates research to Qualified Institutional Investors in the USA only through Banca IMI Securities Corp., 245 Park Avenue, 35th floor, 10167 New York, NY,USA, Tel: (1) 212 326 1230. Residents in Italy: This document is intended for distribution only to professional investors as defined in art.31, Consob Regulation no. 11522 of 1.07.1998 either as a printed document and/or in electronic form. Person and residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers under rules of the FSA.
US persons: This document is intended for distribution in the United States only to Qualified Institutional Investors as defined in Rule 144a of the Securities Act of 1933. US Customers wishing to effect a transaction should do so only by contacting a representative at Banca IMI Securities Corp. in the US (see contact details above).
Trading Ideas are based on the market’s expectations, investors’ positioning and technical, quantitative or qualitative aspects. They take into account the key macro and market events and to what extent they have already been discounted in yields and/or market spreads. They are also based on events which are expected to affect the market trend in terms of yields and/or spreads in the short-medium term. The Trading Ideas may refer to both cash and derivative instruments and indicate a precise target or yield range or a yield spread between different market curves or different maturities on the same curve. The relative valuations may be in terms of yield, asset swap spreads or benchmark spreads.
Coverage Policy And Frequency Of Research Reports
Intesa Sanpaolo S.p.A. trading ideas are made in both a very short time horizon (the current day or subsequent days) or in a horizon ranging from one week to three months, in conjunction with any exceptional event that affects the issuer’s operations. In the case of a short note, we advise investors to refer to the most recent report published by Intesa Sanpaolo S.p.A’s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI’s web site (www.bancaimi.com) or by contacting your sales representative.