Category: zerohedge

IMF Managing Director Christine Lagarde just stole the consensus jam out of the global recovery donut, warning during a speech in Washington that trade wars and tighter credit are dimming economic outlooks, signaling that her outlook for 3.9% growth may be overdone.

The fund will update its World Economic Outlook on Oct. 9 ahead of opening its annual meeting in Bali, Indonesia.

“Six months ago, I pointed to clouds of risk on the horizon,” Lagarde said, according to her prepared remarks.

“Today, some of those risks have begun to materialize.”

One glimpse at the collapse in global economic data and it’s perhaps more than obvious that consensus needs some adjustment…While Lagarde acknowledged the global expansion is still the fastest in seven years, recent data suggest a cooling.

As Bloomberg reports, Lagarde said protectionist rhetoric was turning into “actual trade barriers,” spreading uncertainty among businesses and consumers. A strengthening U.S. dollar and tightening financial conditions have increased challenges for many emerging markets, she said.

Specifically, Lagarde called on countries to resolve their trade disputes, warning that the fracture of corporate supply chains could have “devastating” effects.

“History shows that, while it is tempting to sail alone, countries must resist the siren call of self-sufficiency — because as the Greek legends tell us, that leads to shipwreck,” she said, without naming countries that are putting up new barriers.

Additionally, Lagarde warned nations to guard against “fiscal and financial turbulence.” She said global public and private debt has reached a record $182 trillion, up almost 60 percent from 2007. Emerging markets and developing countries are being pinched as central banks raise interest rates in advanced economies, she said.

“That process could become even more challenging if it were to accelerate suddenly,” she said.

“It could lead to market corrections, sharp exchange rate movements, and further weakening of capital flows.”

And finally, in what appears to be a dig at President Trump, Lagarde urged world leaders to rebuild trust in institutions and policymakers…

“In too many cases, workers and families are now convinced that the system is somehow rigged, that the odds are stacked against them,” she said.

Ironically, she urged this rebuilding of trust while noting that since 1980, the top one percent of income earners have captured twice as much of the gains from growth as the bottom 50 percent.. but we should all trust them now…?

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As the all-important third quarter draws to a close, and with Elon Musk’s legal problems for now in the rearview mirror, everybody is scrambling to come up with an accurate estimate of the number of Model 3 vehicles that Tesla will have produced and delivered during a quarter that is supposed to push the company into profitability according to its CEO.

Sunday night marked the end of the third quarter and, with it, came an e-mail from Elon Musk to employees that seemed to indicate that the company was on the precipice of becoming profitable, but not quite there yet. Musk wrote in his email to employees:

“We are very close to achieving profitability and proving the naysayers wrong, but, to be certain, we must execute really well tomorrow (Sunday). If we go all out tomorrow, we will achieve an epic victory beyond all expectations.”

Though we’re not sure how “epic” of a victory meeting your already disclosed guidance would qualify as, another important question relates to “expectations” for the company and its Model 3. Namely, what are they?

One of the most popular production tools to monitor Model 3 production has been the Bloomberg Model 3 tracker, which was introduced back in February of this year. It tracks the number of VIN registrations that Tesla makes in order to estimate the amount of vehicles that are being produced. This tracker currently estimates that Tesla will have made 53,457 Model 3s over the course of the quarter. This is slightly more than Wall Street estimates of 50,416 and in the middle of Musk’s July estimate of 50,000 to 55,000.

All of these numbers fall short of the 5,000 vehicle per week milestone that was talked about all summer before seemingly becoming all but forgotten amid the latest legal fiasco.

Bloomberg said 94,192 Model 3 vehicles have been made since production started in July of last year. More than half of those came over the course of the last quarter, according to estimates. Bloomberg’s estimate amounts to 4,112 vehicles per week for the quarter.

But the Bloomberg tracker has its weak points. Because it goes by VIN registrations, it is subject to how and when Tesla decides to register VIN numbers. For instance, Tesla filed an enormous amount of registrations in the first two weeks of August: 29,609 of them to be exact. But it hasn’t filed any since then, leading the production tracker to fall off and leave everybody guessing.

Goldman Sachs thinks that this drop off could be because of bottlenecks at Tesla’s paint shop. Others have guessed that it’s a product of the company delivering its “in transit” backlog that it had in place at the end of last quarter.

Here is a list of some predictions for the Model 3, from various sources, that we’ve compiled.

Then, early on Monday, electrek reported that Tesla had produced 53,000 Model 3s in the quarter. 

Of course, this “most important quarter” remains under intense scrutiny because Musk is expected to turn the company profitable and cash flow positive. The company is doing this by bringing all hands on deck – focusing on only the most expensive Model 3 versions, enlisting volunteer work from customers and generally redlining all of the resources at their disposal. The consensus is that if they can’t turn a profit this quarter, it may be difficult for them to turn a consistent profit ever.

The company is expected to report earnings at the end of this month, but it should also report total number of Model 3s produced early this week. Given that the company has dominated the financial media due to the SEC’s recent lawsuit against Elon Musk, we anticipate that the numbers Tesla reports this quarter may be the most examined and opined on in the company’s history.

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Almost exactly 25 years after then-President Bill Clinton signed Nafta into law, President Trump has delivered on his campaign promise to torch the free-trade agreement and replace it with something more amenable to US businesses and – crucially – US workers. The agreement will cover $1.2 trillion in trade between the three countries.

Just hours before a midnight deadline (a hard stop because it represented the last chance for outgoing Mexican President Enrique Pena Nieto to sign the agreement before handing power to the much more skeptical AMLO), US Trade Representative Robert Lighthizer and Canadian Foreign Affairs Minister Chrystia Freeland announced that the two sides had reached an accord, ending a tense period of negotiations during which Canada repeatedly threatened to walk away, something that probably would have led to the collapse of Nafta without a successor agreement in place.

With the easing trade tensions sending US stocks soaring back to just below their all-time highs, President Trump is seizing on the opportunity to take a well-deserved victory lap in the form of an 11 am press conference.

Watch it live below:

Shortly before the press conference was slated to begin, Trump economic advisor Larry Kudlow denied that there were any lingering tensions between Trump and Canadian President Justin Trudeau. While the Mexican peso and Canadian loonie rallied on the news, John Normand, head of cross asset fundamental strategy at JP Morgan, said Monday morning that he expects the loonie to outperform the peso in the coming months. He added that changes to the agreement are “modest” and not “transformational.” Other analysts said the agreement looks more like “rebranding” than “revolution”, though the Trump administration won key concessions that will likely increase the percentage of car parts made in North America, while Canada also agreed to open up its dairy market to US farmers. Canada walked away with some concessions; the new agreement preserves Chapter 19 of the deal, which allows an independent panel to resolve disputes among the agreement’s members, per the Washington Post.

But while Trump was quick to celebrate the deal on Twitter, it’s worth remembering that it must still be ratified by Congress. And if the ongoing confirmation saga of Trump SCOTUS pick Brett Kavanaugh has taught us anything, it’s that nothing is over until the president signs it into law.

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Authored by Martin Armstrong via ArmstrongEconomics.com,

Kavanaugh’s hearing exposed the serious fact that the US Congress has become too polarized to even govern…

What has been done to Kavanaugh is a serious disgrace for if the allegations of Ford are true, then she is at fault for not bringing charges back then and claiming it has defined her life. NOBODY should be allowed to bring any allegations against anyone decades after with no proof. They call them a Cold Case when they cannot solve a murder and Chicago’s track record is that they solve less than even one in six such murders and that is current incidents.

The Kavanaugh vote was strictly down the party line and that demonstrates the problem. The hatred and degree to which a person is attacked goes beyond that person but seriously harms his entire family.

This is now becoming a serious deterrent to anyone in the future looking at taking such a post. Will they find someone in your past you just hates you for some reason who now thinks it is pay-back time? The Congress is now far too disconnected from the notion of God, truth, and justice for all.

There is a complete breakdown of anything civilized in the country they are supposed to serve. The judiciary, which is traditionally distant from partisan bickering, is now smack in the middle of it. This nonsense that those appointed to the court vote only partisan means that we should simply replace the court with an artificial intelligence system that decides cases based strictly upon the Constitution.

This Congress would NEVER be capable of even writing a Constitution. If they existed in 1776, there would be NO United States. If they would have ever agreed to have a revolution against the King, they would have then turned on each other. Very few would have survived such an event. I personally am fed up with politics. My cousin has the musket that our family used in the American Revolution. If my family, who has fought in every war from the American Revolution onward were alive today, they would seriously wonder what they even fought for.

There is no doubt that historians will look back on the hearing as a turning point in this country when the Decline and Fall of the United States was at least exposed and some will make this event as the tipping point. This has exposed that hatred that is brewing beneath the surface. The computer will no doubt be correct.

We have gone way too far to ever return to normality.

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Via Bloomberg’s Richard Breslow,

This is take-no-prisoners time for the markets…

Before I tell you my latest theory, it’s worth mentioning this hasn’t been a normal day. Because in many ways, despite holidays in China, Hong Kong and Australia, along with storms besetting Japan and the aftermath of the natural disasters in Indonesia sounding worse with every update, it has, in many ways, been a very normal day.

Ordinarily, with all that is going on in Asia, I would have forced myself to, mostly, ignore the early price action as unrepresentative. But between a healthy amount of news, a host of economic numbers and the reality of it being the first day of the year’s last quarter, volumes have been very robust. And that’s seen in all the right places, where real or hoped for new developments are being debated.

Volumes in U.S Treasury, S&P 500, bund and BTP futures are all running well above average. And while I could quibble with the magnitude of some moves, there isn’t anything that stands out as a stinker of an idea. Maybe not what I’d be doing, but well within the realm of reasonableness.

While some of the early buoyancy of Asian currencies ended with a mostly flat close, Europe is trying to put a bravely positive spin to things. Hope does spring eternal. And I’d be loathe to pull out my extrapolating calculator. But traders are being a little more clever than it looks on the face of things. While Italian equities are up and BTPs are trying to stabilize, calls on the German Schatz — the most straightforward hedge for Italian troubles — continue to be bought in size… As they were during the worst of Friday’s panic.

I’ve noticed a strange dynamic when talking to traders…

When European assets go down, no one professes to believe anything being officially said.

But when traders want to buy, they seem to be willing to take everything at face value.

So much for having perspective. Or maybe just weighing what price level will set the ECB into “whatever it takes” mode.

On the week, obviously Italy and U.K. news will dominate early. No one, but me, seems to have put the latest Catalonia protests nor the Bavarian elections in two-weeks time back on their radar screens. Trade and diplomatic tensions with China have been short-sightedly pushed off the page by USMCA.

But that aside, and some global meh numbers over the weekend and today, sovereign yields are very much in play. For whatever it’s worth, I cite support and resistance levels and get back, “Yes but where will they go when they break higher”? This is going to be a major theme that could carry through for the whole of the quarter.

And now my theory for understanding price action for the quarter.

Hedge funds are once again under-performing their benchmarks. The HFR indexes don’t make for pretty reading. There has been a lot of speculation that realized volatility will be headed higher. I think that’s correct because this is the last gasp to salvage a lot of people’s years and that makes for manic market chasing, back and forth. It’s a very difficult period to keep any powder dry and the appetite for losses will be extremely low.

Imagine the agony of walking in and seeing the S&P futures up over one-half percent. The dollar is torturing people. The Bloomberg Commodity Index is up hard on a move I’m not sure a lot of people caught. And bond yields are a tough way to make money fast.

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Following slight disappointment in Europe, and a collapse in Canada, Markit’s US Manufacturing PMI printed, as expected at 55.6 (highest since May) even as Services collapsed. ISM’s Manufacturing survey – which soared in August – was expected to drop, and did but more than expected (59.8 vs 60.0 from 61.3 in August)

• Markit Manufacturing PMI rose from 54.7 to 55.6 (same as flash and expected level)

• ISM Manufacturing fell from 61.3 to 59.8 (below expected 60.0)

Despite the ongoing slump in real ‘hard’ economic data, surveys continue to hope for the best…

 

The overall performance was driven by sharper rises in output and new orders, though new business from abroad continued to expand at only a marginal pace. Markit’s report shows employment drop to 53.6 vs 54.2 in August, the lowest reading since August 2017…

Chris Williamson, Chief Business Economist at IHS Markit said:

“US manufacturing showed resilience in the face of storms in September, with output rising at one of the fastest rates seen so far this year. New orders growth has lifted to the highest since May and is being boosted in particular by strong domestic demand, especially in consumer markets. In contrast, export orders grew only very modestly again.

“Worries about trade wars and tariffs continued to dominate, pushing business confidence in the outlook down to its lowest for a year.

“Tariffs, alongside higher oil prices, were meanwhile a key factor reportedly driving input costs higher. Almost two-third of all companies reporting higher input prices ascribed the increase to tariffs.

“Worries about the impact of tariffs on prices also led to increased incidences of stock building, exacerbating existing supply chain delays and driving prices further higher. Raw material inventories rose at one of the steepest rates seen this side of the global financial crisis.

“While stock building boosts current sales at suppliers it poses downside risks to growth in future months.”

ISM painted a different picture:

Prices Paid and New Orders tumbled…

As Respondents noted…

“The market is in a state of chaos with the latest round of tariffs. As an electronics original equipment manufacturer, our component prices have been impacted almost across the board. The tariffs have caused a mass rush to buy up inventories of affected products in order to minimize the long-term financial impact. This, in turn, is causing market constraints, which further drive up the cost and increase lead times.” (Computer & Electronic Products)

“Tariffs starting to take a bite out of profitability.” (Chemical Products)

So take your pick – ISM bad (but prices down and employment up), PMI good (but prices up and employment down).

 

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With hedge funds painfully lagging the market, as shown by the HFRX Equity Hedge Fund index, which remains not only red for the year, but is near its 2018 lows…

… performance panic is starting to set in as we enter the last quarter of the year. Bloomberg’s Richard Breslow put it best earlier this morning: “Imagine the agony of walking in and seeing the S&P futures up over one-half percent. The dollar is torturing people. The Bloomberg Commodity Index is up hard on a move I’m not sure a lot of people caught. And bond yields are a tough way to make money fast.”

So what happens next? Well, according to Nomura’s head of X-asset strategy Charlie McElligott the pieces are now in place for the tactical October “Cyclical Melt-up 2.0” that he has been anticipating, with this morning’s action a harbinger of what is coming as USTs and USD are on their back-foot post Canada / NAFTA 2.0, while Commodities and EMFX are rallying to multi-week highs.

Meanwhile, within risk assets, break outs are everywhere:

Within Equities, we see Materials-, Financials- and Energy- sectors leads Eurostoxx performance tables on the quarter-opening session, while from a Factor-perspective, we see “Beta” and “Default Risk” strategies perform well in Europe and Japan markets overnight.

The breakout in Crude is also notable, as Brent moves towards its 100-month MA and WTI cracks its May resistance back towards re-testing July highs.

This morning’s “up-in-risk” dask comes despite disappointing Asian & Euro-Area Manu PMIs (China Caixin Manu PMI specifically at 50, the lowest level since Mar ’17), as well as a weaker Japanese Tankan print, which to McElligott confirms his view that risk-assets are “trading short” (“low nets,” “grossed-down” or simply “too defensive” positioning) as we begin the annual Q4 “performance anxiety” phenomenon.

Menawhile, with both the ECB and Fed either accelerating tapering (ECB’s bond purchases are cut in half again to just €15BN/month while the Fed’s balance sheet shrinkage rises to $50/month) Into October’s imminent “QT Impulse,” the Bond Bears continue to grow further emboldened, according to the Nomura strategist with Friday’s CoT report showing not only the biggest net short position on 10-year notes on record…

… but additional net selling of -$15mm/01 across the UST futures complex (biggest sales came via TU -$3.3mm/01, TY -$5.2mm/01, and US -$6.4mm/01), “as all segments of the futures market saw spec selling with the exception of Eurodollars, which saw +$2.5mm/01 of buying.“

More rates bearishness emerged out of Japan this morning, where the ongoing “bear-steepening” in JGBs continues as BoJ efforts to widen the YCC band seem to be working, helping the TOPIX Banks rise +6.5% in three weeks and the Nikkei hitting the highest level in 27 years on the back of the weaker yen.

Meanwhile, McElligott notes that back in the US, Eurodollar calendar spreads in ’19 are jumping higher over the course of Sep / EDZ9Z0 reversing the multi-month inversion to again trading “positive” over the past two weeks, the buyside is seemingly “upgrading” their view of the U.S. Economy by delaying the “end of Cycle” trade, which aligns with the repricing of a “higher” Neutral Rate.

Putting all that in context and summarizing what happens next according to the Nomura strategist, here is McElligott’s “view”:

Expecting a strong move for “risk-assets” throughout October on

1. U.S. EPS-season “macro blinders” for Equities managers
2. “weak Dollar” perpetuating risk “virtuous cycle” (+++ for Commods & EM and broad “Inflation Expectations”) and
3. big “Quantitative Tightening” -> “Bearish Rates” flows (“hawkish pivot” / “supply shock” / inflation trajectory) keeping pressure on UST yields (higher)—thus making “Cyclicals over Defensives” / TIPS over Nominals as the top tactical positioning for the month.

Finally, there is the seasonality factor, which – according to data since 1994 – suggests that October is the month most bullish for risk:

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Authored by John Rubinho via DollarCollapse.com,

The idea that as more people move to Hurricane Alley and other storm-prone places, the future cost of those storms will rise – and that we’re not accounting for that future cost and are therefore likely to be shocked by it – makes intuitive sense.

Now some recent studies have fleshed out the numbers, making it possible to tell this story visually (courtesy of yesterday’s Wall Street Journal). So here goes:

We’ve been encouraging people (through Federal Flood Insurance, artificially-low interest rates and state/local greed) to move from the interior of the country to the coasts, raising the population density of sunny but stormy locales like the Carolinas and South Florida:

All these new people need houses, stores, roads, etc., which means the cost of rebuilding after future storms is rising as well. Note on the following chart that completely rebuilding Naples, FL would for some reason cost 250% of municipal GDP:

Meanwhile, it turns out that a hurricane’s impact has less to do with the speed of its winds than with how long it sticks around, dropping rain and causing floods. So the important number is a storm’s “forward speed,” with slower being more damaging. And lately – perhaps due to warming ocean waters – storms have been slowing down:

So: Add more people to places that are seeing bigger, slower-moving storms, and the equation spits out higher damages per storm:

The conclusion? Rising storm damage for as far as the eye can see, with a real chance of a monster storm hitting a big city like Miami or New York and giving us a trillion-dollar summer, bankrupting some major insurance companies, depleting Federal Flood Insurance and forcing the federal government into yet another massive bail-out – just as federal deficits are exploding, public sector pensions are imploding, and student loans are defaulting en masse.

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With virtually every bank now urging their clients to fade the rally in US stocks, and instead take advantage of the gaping chasm that has opened up between US and European stocks to put on a pair trade that is long Europe and short the US, “renowned commodity investor” Dennis Gartman has defied the sellside again, and in his latest note writes that he “officially” bought US stocks while selling Europe “generally via the Euro Stoxx 50 Index.” So far, the trade appears to be working, to wit:

The US equity market futures are soaring on [the Nafta] news with the Dow futures trading approximately 200 points higher… or about 0.7% higher… and with the S&P futures trading 17- 18 “handles” higher o4 +0.5%.

On Friday… finally… after discussing the idea at some length for some rather long while we actually and “officially” did buy US  stock indices while selling Europe generally via the EURO STOXX 50 Index and we got very, very lucky for as we write we are nearly 1% higher on the US side of the trade and nearly 1% better on the European side of the trade. The only question now is when to add to the trade and we shall wait to see how far this initial trade moves before adding to the position on the inevitable correction.

We may scoff at President Trump’s insistence that the new agreement not be called the NAFTA and must henceforth be referred to as the USMC but the fact that agreement has been reached is hugely positive news and has sent US stock index futures soaring. Canada’s stock market shall follow suit, and so too should Mexico’s.

As for our retirement account we’ve done nothing for the third or fourth day in a row, remaining long of gold and remaining long of bond and/or bond-like funds, most of which went ex-dividend on Friday. We’ll be looking to swap out of the funds we have for funds that go ex-dividend in the next week or two, but otherwise we are very likely to sit tight and do nothing else.

As an added bonus, here is Gartman discussing the SEC’s settlement with Elon Musk…

Finally, the SEC has proven itself to be emasculated in its decision to fine Elon Musk and Tesla a scant $40 million… $20 million for both… and to have Tesla remove Mr. Musk from his position as Chairman but allowing him to remain as the company’s CEO. This is comically insufficient punishment as far as we are concerned given the seriousness of the offenses. Shame upon the SEC for this diminished decision.

… and his take on the ongoing Kavanaugh nomination drama:

We feel again compelled to discuss the events of last week as Judge Kavanaugh’s and Dr. Ford’s appearances made the most compelling television we’ve witnessed since the Watergate hearings nearly four decades ago. Let us be quite honest here: we were stunned by the sincerity and compelling nature of both Judge Kavanaugh and Dr. Ford. As we said here on Friday, there is no question in our mind but that something horrible happened to Dr. Ford that night in ’82. Her story was real; her appearance compelling. Her desire initially to have remained anonymous was obvious and just as obvious was the vile nature of the Left’s use of her as an attack point against Judge Kavanaugh. Initially, and before her appearance, we thought of her as a Left-wing partisan. Clearly, she was not and is not. We are convinced that was not her intention.

Shame then upon Sen. Feinstein for having rather withheld Dr. Ford’s letter to her until so late in the proceedings and nothing shall ever convince us that someone in her office… or perhaps even she…had leaked Dr. Ford’s letter to the press. That was a  shameful act of partisanship on Sen. Feinstein’s part and she should be ashamed of herself. Obviously, however, she’s not only not even slightly ashamed, and we suppose she now sees herself as an icon of the Left. We are all diminished for her actions and what we’ve been forced to witness.

Indeed, what last week and what this week shall be about was and is the fear on the part of the Left that it is about to lose control of the Supreme Court for decades into the future with the appointment of Judge Kavanaugh. The Left has viciously sacrificed Dr. Ford, her family, Judge Kavanaugh and his family for that fear and they are willing to embarrass the US in front of the world to stem that fear. Shame upon Sen. Feinstein; shame upon Sen. Booker; shame upon Sen. Coon et al. Who, after this shameful scenario forced upon us by the Left, shall ever allow his or her name to be put into the nomination process for any ranking government position? Who… really, who?

Barring some further salacious rumors regarding Judge Kavanaugh’s past this week, when this is done, Judge Kavanaugh’s nomination to the Supreme Court will pass through the Senate with more than 50 votes. When the vote counting is done, but before the vote is actually taken and when Sen. McConnell quietly reports to his fellow Senators that he has the votes to win, Senators Manchin and Heitkamp will vote for his nomination too giving the vote a clearer majority of perhaps 53-47. Judge Kavanaugh will become Justice Kavanaugh but the smell… the stench… of what the Left has done shall linger for years into the future. Again, shame upon them. We are disgusted, and we are embarrassed.

 

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With just six months left before Britain is due to leave the EU in the country’s biggest shift in foreign and trade policy in more than 40 years, and with the Brexit drama ongoing without a clear resolution, moments ago Bloomberg reported that U.K. Prime Minister Theresa May is preparing to make a significant new Brexit offer to the European Union in an attempt to open the door to a deal.

Brexit negotiations have stalled on the question of how to avoid the need for police and customs checks on the border between the U.K. and Ireland, but the British side now sees a path to reaching an agreement, a senior British official told Bloomberg.

The U.K.’s offer applies to the so-called Irish backstop, a legal guarantee to ensure that the border between Northern Ireland and the Irish Republic remains open and free for travel and trade after Brexit. It would only apply as a last resort in case an overarching trade deal doesn’t address the issue.

Under the plan, which is expected to be proposed later this month, the U.K. would back down on its opposition to new checks on goods moving between the British mainland and Northern Ireland. In exchange, May’s team would need the EU to compromise and allow the whole of the U.K. including Northern Ireland to stay in the bloc’s customs regime.

Although the picture is detailed and complex, the outline of a deal — as the British see it — would potentially unlock negotiations which have been in virtual stalemate since March.

The EU says without agreement on the backstop, there can’t be an exit deal. That would mean Britain crashing out of the bloc in March, and no transition period before future trading arrangements take effect.

As previously explained, the Irish border problem arises because after Brexit, the U.K. will no longer be part of the EU’s customs union and single market. The EU says this will mean goods moving into Ireland will need to be checked to ensure they comply with safety and quality standards rules and that the correct tariffs are paid.

Both sides want to avoid imposing security and customs checks at the frontier between Ireland and the British province – which would revive memories of the sectarian conflict that gripped the region for decades until a peace deal was reached 20 years ago. In order to avoid these checks taking place at the Irish border with Northern Ireland, the EU has proposed keeping the region inside its customs territory.

That would require checks to take place instead at a notional border down the Irish Sea – between Northern Ireland and the British mainland. May has flatly rejected this option – warning it would divide the U.K. constitutionally into two separate customs territories, something she said no prime minister could ever contemplate.

So what is the solution?

The proposed compromise revolves around the distinction between customs checks and regulatory checks. May wants to keep the whole U.K. – including Northern Ireland – inside the EU tariff regime as part of the backstop plan. The EU is currently opposed to allowing this, and wants only Northern Ireland to remain inside its customs territory after Brexit. That will need to change if there is to be a deal.

Under the British plan — which has not yet been announced and could change — the U.K. would keep goods regulations in Northern Ireland closely aligned with the EU rules applying in the Irish Republic. But new regulatory checks would be implemented on goods passing between Northern Ireland and the British mainland, where different rules could apply once the country is outside the EU.

* * *

Following the news, the pound jumped, rising as high as 1.3116 against the dollar before paring some gains. As Bloomberg’s Richard Jones notes, “we’ve been here before.” He adds that obviously the devil is in the details, “so the reaction will probably remain muted. Any compromise still has to get through Parliament (not to mention Conservative party conference) and the EU will need to approve it as well. Pitfalls remain and a deal is still not nailed on.” Still, at the margin this does move the situation away from a no-deal Brexit.

 

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