This note focuses on some of the political and geopolitical issues ahead. On the domestic front, the main focus has to be the negotiations with the EU. Last week saw the triggering of Article 50 by the UK and the immediate response by the European Union. The bureaucratic and political wheels are thus already in motion, with every turn likely to attract media attention, with the potential to influence the market. The next major event looks set to be the late April EU Summit at which they meet to decide their formal guidelines and at which there should be greater clarity on their approach and where the rhetoric is likely to be turned up. Although last week probably went as well as the markets could have expected, already three issues have been flagged in the various commentaries: the Prime Minister's apparent linking of security to trade in the event of there being "no deal"; the EU's desire to limit the UK from cutting tax or regulation in return for a trade deal; and Gibraltar. Naturally, it is too early to draw any conclusions from this.
Of course one of the initial difficulties is the negotiation process. While Article 50 triggers the exit process, it is Article 218 that determines the future relationship. The EU not only sees Article 50 as starting the exit process but also sees it as determining the cost of the exit and they would like this to be settled first before the future relationship is negotiated. In contrast, the UK takes a different view, believing that the cost and future relationship should be determined at the same time.
In her late January Lancaster House speech, the Prime Minister made clear that the UK wished to be outside the Single Market, more or less outside the Customs Union, and would wish to conduct a Comprehensive Trade Deal with the EU and trade deals with the rest of the world. She followed this up with a speech in Davos in which she stressed the UK would be globally focused, not inward looking, and in doing so she tweaked the tone around immigration that she had outlined in her October Party Conference speech and which at that time had gone down badly with the financial markets. Then in her letter regarding Article 50, the Prime Minister outlined seven principles for negotiation: one, the UK will leave the Single Market and in doing so, will respect the four freedoms of the EU; two, the need to resolve the citizenship issue; three, the desire for a comprehensive agreement; four, desire to minimise disruption and uncertainty; five, Ireland and the border issue; six, the need for detailed and technical talks on a number of areas, including financial and "network industries"; seven, the support of European liberal values. The devil, of course, is always in the detail, and we will return to these in future. In many respects, investors need to look through the near-term uncertainties and focus on the longer-term drivers ahead.
There are also many other geopolitical issues to keep a focus on to. For a start, when it comes to Europe, don't overlook the ongoing political dynamic on the Continent. As we have already written on there is the imminent French Presidential election, with the German election in the Autumn. There is also the election few have yet talked about: Italy, probably next spring. At the weekend I spoke at a conference in Italy on the future of Europe, speaking after the President of the European Parliament, the Italian Antonio Tajani. His speech was interesting, stressing the need to focus on the "real economy" and on small and medium sized firms. But what struck me was the overall pessimistic mood and deep scepticism towards Europe - not from him - but from the many business people present and from other speakers. Even those who were positive talked more of "multi speed" and the need for a change in direction. For investors, the message is "noise" and potential volatility. This is likely to be reinforced by the beginning of the Brexit process.
Finally, the next few months will be busy in the world of geopolitics and international events. This week sees the US-China Summit. President Trump's warnings over the weekend about North Korea are understandable; a year ago the Clinton team indicated that they expected this to be her biggest foreign policy issue were she to be President. In the past, the six nations talks, with China playing a lead role, has been the preferred route for everyone to address this issue, and one expect such an approach may be preferred option now, but only if it is seen as putting more pressure on North Korea to halt its arms process. Whatever happens, the markets would like to see agreement between the US and China on the process ahead. Similarly, in terms of bilateral trade issues between China and the US. Financial markets reacted positively to President Trump's initial policy agenda. This honeymoon period, however, has proved short-lived, as he has run into trouble on the domestic policy front. Equity markets, in particular, both in the US and across Asia Pacific, would be nervous were the US to be seen to be running into tensions with China on trade now. One would hope that discussions progress well, but it is another near-term concern to keep in mind.
Some key dates ahead:
This week, US-China Summit in Florida.
April 21-23, International Monetary Fund spring meetings in Washington, including their latest assessment of the world economy.
April 23, First round of the French Presidential election (top two candidates proceed to the second round, unless in the unlikely event one candidate secures more than 50% of the vote).
April 29, "Brexit Summit", as EU 27 meet to discuss Brexit guidelines.
May 7, Second and final round of the French Presidential election.
May 14-15, President Xi of China hosts the Belt Road Summit in Beijing, to which many global leaders have been invited including Theresa May, but she is expected to visit China later this year instead for a bilateral summit on trade.
May 26-27, Italy hosts in Sicily the annual G7 Summit, attended by leaders of the G7 plus the EU. July 7-8, Germany hosts in Hamburg the annual G20 Summit, attended not only by the G20 leaders but also many other invited leaders and guests.