The Odds Are Increasing For A Second Brexit Referendum

on leaving the European Union? Today we heard from Prime Minister Theresa May who seemed to put that squarely back on the table, which really raises questions about whether this time maybe this is going to happen. To raise Raphael Bloomberg Opinion editor, joining us now from London to raise what what actually happened today? High They said, well, this was May's last roll of the dice, so talks with

the Labor Party broke down last week. May has promised to bring her Withdrawal Agreement Bill, which is the bill that implements the Brexit deal, to Parliament next week and she needed to do something uh quite dramatic to overcome the wall of opposition she has faced in Parliament, which

is delivered three defeats of her Brexit deal. So what she's done is promised a number of measures, some of which are not going to be controversial, so environmental protection levels maintaining at the same level as the EU, workers rights being aligned with the EU. But the the sort of headline is that she has given the MPs a vote on whether to hold a second referendum and she

is promising some kind of customs compromised. She didn't tell UH, she didn't tell us today what that would be, but she has said it will be a temporary customs union type compromise rather than the permanent one that the UH Labor Party had asked for. But thereas there's a catcher, right, I mean, this doesn't something have to happen first before this can all occur. Well, there's always a catch with

with brexit. UH. The withdrawal Bill has to go into a second reading, which allows the MPs to make amendments to it, so that UH, so that all of these different changes that different MPs want UH can be UH can be put forth. It has to be approved to be put forward to the MPs, which it probably will because it's being changed substantially. But you know, I think the real question is whether she's overcome enough of the opposition from both the Labor Party and from her Conservative

backbenches to cobble together a majority here. Um, you know, we've yet to see the reaction, We've yet to see what the exact details are. We don't know how Thursday's European Parliamentary elections are going to play out. But just looking at it, you know, from a few minutes after she's spoken, it's really hard to see how this does enough. My one caveat is it depends on fear. How much do MPs fear no deal? How much do they fear

a Jeremy Corbin leadership. If you're a conservative voter, how much do they fear Nigel Farage is Brexit party, which is been rising in the polls. If there's enough fear, maybe she has a chance. It's interesting when you talk about the reaction. I'm looking at the pound and the initial reaction just that the concept of a second referendum was incredible. It was a spike in the pound versus

the dollar. Uh that has since retreated almost entirely as people look through the fine print and see that, you know what this is just a carriage try to get some MPs through this process to at least not totally snubbed their nose on voting. Yet again, does this make does what happened today and Theresa May's proposal make it more likely that there will be a second referendum or is it just basically paying lip service and trying to

throw a bone enough to get this thing through. Well, I would say a second referendum has become marginally more likely, both after her speech but even before that, because a a new Tory leader. She has said she will step down. There is a reasonable presumption that a hard Brexit or someone who wants a hard no deal exit will take

her place if that happens. If we get to October three first, if Parliament somehow refuses to allow a no Deal, there's still a likelihood that this could go to another vote before it goes to a general election, which both parties want to avoid. Now, so I think the chances of a second referendum are getting a little bit stronger. So Theresa, what is the future of Theresa May right now? How long does she have left? Would you guess? Well,

she has very little time left. She will probably announce her a timetable for her departure once this vote happens, but she has said she will go regardless. So you know, even if her dream scenario plays out and she gets a Brexit deal through, she has still announced that she will leave. So I think we are likely to see you know, the leadership race is already underway. We may very well see a new Tory Party leader and a

new Prime Minister before the end of the summer. We know that several members of the European Commissioned European Union have supported another referendum, would like to see this whole thing go away and the UK just simply rejoin the European in Union. Are they involved at all in this whole process as it's sort of muddles through Parliament. Well, we'll have to see what sort of reaction we get there.

But from the list of ten changes that she announced today, I couldn't see any that would really bother the EU. They will, you know, they were pleased that there were cross party talks and and and I think there was a measure of dismay when they broke down. Um, I think the EU is sort of braced for the worst.

Their brace for Theresa may uh leaving the scene and for a hard Brexitter taking her place, so that I think they'll be They'll be happy to see one last roll of the dice and and hopeful that it turns up either agreement to her deal or possibly UH move towards a second referendum. But at this stage I don't think on any side of anyone is counting on that happening. Well, Theresa who is is the right front runner to replace Theresa May? I think if the front runner we'd have

to say as Boris Johnson. He is uh the the the best known Conservative figure. He's the one that a lot of Tories believe is best place to take on Jeremy Corbyn. And now you know, Nigel Farage is Brexit party which is winning over a lot of Conservative votes. And of course he is a real Brexitter who has UH advocated leaving even with the no deal, so he would be amenable uh to UH to either not negotiating

at all or negotiating a a new arrangement. But he would be UH the He would be certainly the preferred choice of the Conservative Party members and it is likely they who will get to choose because the Parliamentary Party would submit two names to the membership, and the membership um are are pretty unequivocally for Boris just thirty seconds Boris Johnson and I tell Farrage. Could either of them win? Could either of them win the election? Win in a

general election? For Farrage, it's still a big uphill battle. Britain's parlia mentory system as a first past supposed system, so small parties don't tend to do well. But that said, I've just seen him in the West Midlands. He has exactly those ambitions. So as Raphael Bloomberg Opinion editor, thank you so much calling in from London. Well. Rising trade tensions with China have royal financial markets over the past several weeks, yet they are still holding onto double digit

gains in SMP. To get a sense of where we go from here, return to Jonathan McKay john as head of sales for the Wealth Management Solutions at Schroeder's based in New York City. John, thanks so much for joining us. Boy, it's been a kind of a bumpy last couple of weeks and the trade tensions have kind of come back into investors focus. How does that fit into your view of the equity markets? Currently. Thanks Paul for having me and shout out to your optimism over a our excitement

or a second potential second referendum in the UK. It's been my call, share share, I share that excitement. So OURBU is that the mark it should be lower UM, specifically US markets. I think there's way too much optimism of the reaction function of UM, both policymakers from a political perspective as well as from essential bank perspective and what they can do to offset the risks of the trade war. The rally at the beginning of the year

was basically built on a three legged stool. You had cheap valuations start with, and optimism over the growth outlook given where we were in the fourth quarter of last year, which was essentially that the U S economy was at risk of going into recession, a dobash turn by central banks, as well as optimism around the trade deal. You've knocked out one of those legs UM with their rising escalation and trade tensions here with China UM, so then you

get back to well dovash central banks help at the margin. UM. The growth outlook isn't as bad as it was in the fourth quarter of last year, but it's not that good, and the earnings outlook isn't that good. So why should markets rally um after rallying this year at the levels are currently at. So I think there's more downside potential from him than there is upside even in a good outcome in the trade are how much downside? It's tough

to say. I mean, look, you're three to four percent down um off the peak, somewhere in that range um. The US equity market is still trading at roughly sixteen and a half times forward pe. I think there's too much optimism of our earnings growth. So if earnings estimates actually come down as we moved through the second and third quarter, the marketing theory get richer, right, unless that

multiple decline. So I think a multiple suwhere in the range of sort of fifteen to fifteen and a half, it's fairer value for the US equity market, which means you've got probably you know, somewhere in the somewhere in the range of about five to seven percent additional downside. So you started off commenting on Paul Squeeney's excitement about another referendum in Great Britain, and I have to wonder how much of a game changer that would be from

an asset perspective. Currently looking at the pound that is gaining a versus the dollar, but not by that much, So it seems like it's not exactly as if the markets are pricing in this possibility. But is this something that would materially change your outlook for European assets? Uh? Yes, it would make us. So we're already on a relative basis,

we're already more optimistic about European equities. Um, even with all the turmoil that you've seen happening in the UK over the last six months or so, UM, all the Theresa A deals coming to a getting rejected, etcetera. Um, then we are relative to the US. It doesn't mean we expect gangbuster returns in Europe, but expectations are lower earning his growth is actually better based on consensus expectations

in Europe than it is in the US. And we think the dollars over valued and should decline versus the euro. And that helps you from a total re term perspective if you're a US based investor, so you added in a second referendum with a likelihood that it actually gets passed, that they stay UM in the euro in the European Union. I think that would definitely help sentiment and provide UM, you know, a little bit of more bullish upside for European equities as a whole. But I'd be a little

bit cautious. I was being a little bit cynical about jumping on Paul's bandwagon there, just because we've seen so many false starts over the past six months. But if it does move down that direction, I think we can UM, you know, we can get more bullish on Europe. John. I'm looking at the w I RP function on the Bloomer terminal, which and it shows that the investors are looking roughly seventy percent of investors are looking for a rate cut by the Fed. By your end, what is

your view? So I think that's look at rates are going to head lower at some point. Right we're near the nearer the end of the cycle than we are near the beginning. I think there's a little bit too much optimism in UM the likelihood of a rate cut.

I think part of that is because of the escalation in the trade war and the fear that UM if we do putariffs that does move forward on the remaining three billion dollars of Chinese inputs, and then China retaliates, the count retaliate, and kind that they can do other things to try and hold our economy indirectly. UM that the federal react in the automatically cut rates. What everyone's

forgetting is that that adds to inflationary pressures. We saw that, you know, the primary example of being washing machine prices at the beginning of last year, and so you'd get a direct follow through to UM core goods price inflation going up, not to mention wage inflation which has been rising for the past three to four years. So I think the Fed would cut rates, but probably not as quickly and as much as the market is hoping for. John McKay one quick question, Hi, yould bonds pro or

anti anti? Why elaborate there? I'll give you. So the quick story is valuations a way too rich. Um. If you think corporate earnings are slowing down, the amount of debt that UM corporates in the US have taken on over the past seven or eight years, UM, they're gonna have to pay a price to that. Not suggesting a you know, a quick rise in the default rate, but you will see companies losing access to the capital markets, and thus investors will amount of higher risk premium meanings.

Hi you old spreads will have to widen from current levels, which are around three sixty three eighty basis points off. I think we think there are better options out there for investors to get yield. I would throw non agency securitized out there, as well as certain parts of the E merging market debt universe. John McKay, well done, Thank you so much for joining us. John McKay a head of sales focusing on wealth management solutions at Schroeder's based

in New York. Well, yesterday it was an odd day for the pending Sprint t Mobile merger. First, the FEC said that it was inclined to approve the deal. Then just a couple of hours later, the d o J said not so fast. So hopefully our next guest can help us clear things up. Jennifer Rees a senior litigation

analysts for Bloomberg Intelligence. She joins us live here on the Bloomberg Interactive broke her studio, So, Jen, I have to admit, of my thirty years roughly of following communications deals, I don't ever recall the d O J and the f c C, you know, opining on the same day and having different views. What do you think is going

on here? You know, it's really strange, And you are exactly right because I did some research on this and found the only one instance of the f c C and d o J disagreeing on ultimate outcome, and this was in the nineteen seventies, So you're thirty years before my time, before your time, Paulics exactly. So you're you're right on that this is really strange. Um, it's not.

It remains to be seen what happens here to It just may be that the d o J needs a little bit more than what the companies have offered up to the FCC. And I think it's actually not surprising because you know, Sprint and T Mobile have offered to divest one of sprints prepaid brands, and they have two brands now. The other brand, Virgin Mobile, is very small compared to Boost Mobile, but still the d o J would want them to divest their entire twelve percent share,

and they're not offering to do that. So it may be that they just need to divest both brands, or it may be that they need to divest more and not just the brands. In other words, satellites more business assets than what they've offered up to the FCC. So I think they may still have some room here to

bargain with the Department of Justice. Well, certainly that's what the markets are betting on, because we're not seeing enough of a sell off in Sprint shares, which are down about two percent today following the game yesterday, and you're not seeing enough of a decline in the bonds of Sprint either to sort of represent the markets are writing off this deal. I mean, still it is being baked in. I'm trying to understand what could have happened. Don't the d o j uh and it doesn't do the DJ

and FCC speak to each other. Yeah, they've been communicating the whole time, you know, during the year long investigation, and they've said publicly that they've been coordinating and communicating. So so the dual message yesterday was a little bit odd. It's hard to say what is happening there. But the FCC clearly wanted to come out with their decision. They

were ready, They had extra time. Their their clock doesn't run until early June, so they didn't have to say anything when they did, and the Department of Justice may have been reacting to what they were seeing in the news. An immediate reaction by many that well, it's a given that the Department of Justice now is going to clear and maybe they just wanted to make the point look not so fast. We do our own independent investigation, we have a different standard, and in fact we may need more.

And in my I'm not surprised by it, because I do actually think based on their standards, they do need more. You know, when when they accept a divestitor to remedy a deal, they need to replace all of the competition lost virtue of the merger. Twelve percent is being absorbed in this prepaid market, That entire twelve percent needs to go to a new competitor, and that isn't what's Britain Tea Mobile have offered up the FCC. Now. This is

just on the prepaid side. It could also be that the Department of Justice has some issues on the post paid side, So the market's reaction may also be a little bit too optimistic in that it's unclear to me whether they are resolved on the post paid side. The numbers don't look quite as bad there in terms of the market share combined, which is at about and the

concentration numbers. And it's in that area that they're going to look at the pro competitive consumer benefits that could come from this and balance that against some potential harm. But it's not a given that the d o J is over the hump there either. It's interesting that you know this. When the President Trump and Republican administration came into power, the expectation was, Okay, let's do M and A deals. The d o J is not gonna be a problem. But they were very, very tough on A

T and T Time Warner. The appear to be taking a pretty strong stance here. What do you think is going on? You know, the the A T and T Time Warner deal. That was a big surprise, and I think it took a lot of people, particularly in the antitrust community, by surprise when that happened. And I think some of it just may simply be the fact that there was a lot of press about the fact that this new Republican administration would be so easy on mergers.

And you know the fact is that if you go back in history and you look at statistics, the difference between Democratic administrations and Republican administrations and merger enforcement is it really only incremental? It really isn't as big as I think the reaction was when Donald Trump was elected

and started to put the point his own people. You know, the difference tends to be in pursuing monopolistic conduct and things like that, and the Republicans do tend to look at efficiencies and give efficiencies a little more weight, let's say, than the Democrats. But it really is only an incremental difference. So I think the aggressiveness should have been expected in

this age of these great big mergers and consolidated industries. Yes, still though a real head scratcher in terms of the dual messaging yesterday from the d o J and the FCC. Jennifer Ree, thank you very much much, really illuminating. Jennifer Rea's senior litigation analyst for Bloomberg Intelligence. Well, we are ten plus years into this financial psycho, We've got the Fed on the sidelines, and financial markets quite frankly, this

year performed exceptionally well despite the near term volatility. To get a sense of where we go from here, Pleased to welcome our next guest, Christiana Mamani, chief investment officer and had a fixed income for Oppenheimer Funds, and Peter Straktowski,

portfolio manager for Oppenheimer Funds. They joined us on our Bloomberg Interactive Broker Studio and to point out that Christian and Peter recently celebrated their ten year anniversary of the firm's investment grade Debt Team, which manages over six point six billion dollars primarily investment grade assets. So these folks have been doing this for a while. So Chrystial, let's start with you, um the rising trade tensions. How are you positioning the portfolio for what might be a prolonged

heightened sense of trade concerns? Well, so, the first thing with respect to trade tensions to the fact that it's not a good outcome for anyone, despite what Trump or President She may be saying. It's bad for China, it's bad for the US. But I think what we need to focus on is the magnitude of that badness, if you will. So it's uh, it shaves off roughly half a percent from U S GDP and probably slightly more

than that from the Chinese GDP. Uh, So it's a it's not a good outcome, but it's a manageable outcome, and I think our expectation is as a result of this, the likelihood of FED easing increases in and the likelihood of the Chinese policymakers trying to stimulate their economy to help help support that economy is probably increasing as well. So it's not a good outcome, but it's not the end of the world. After the D rating that took place last week, our expectations still that markets go higher

and global equities is still the place to be. But that's what I was going to say, is that it sounds like this is a perfect environment for risk acids because it sounds like from what you're saying, there's gonna be more stimulus and FED easing, and certainly we have the ECB and others also moving into an easy stance. Peter, I'm just running from the fixed income standpoint, from investment great debt standpoint, which area of the market looks most

attractive attractive given that backdrop. Okay, So I think, UH, despite what you hear or read somewhere else, I think that the US corporate sector UH still offers decent value over treasuries on average, that spreads on the trip will be rated. Bonds are hunting fifty basis points over a course of five to seven years. So that's that's still decent value with low holatility. And we're still in the credit cycle. Uh, as far as you know, we we

tend to look six to twelve months. Are I think over the next three years the FED doesn't move where FED is very cautious. Credit cycle is going to continue. In corporate Dad will do well and sam with asset backs because the US consumer is doing very well. Balance sheets at at households are strong, and that will continue to perform very well. So, Christian, are you of the opinion like when Lisa and I look on the Blommer terminals roughly eight odds of a rate cut by the

end of the year. Is that kind of where you think rates are going in that timeframe? Well, so, I think the markets have kind of gotten little ahead of themselves. So I think while the data today is soft, our expectations still that in the back half of the year data probably uh that improves and as a result, the

FED probably doesn't cut rates this year. Having said that, if there's any bit of give on the economy, the FED is probably going to be far more proactive because it's really worried about the trade issues, and uh, their reaction function with respect to the moment they see the weakness to how they're going to react is going to be much shorter with trade than anything else that we

have faced off late. One thing I'm struggling to understand is what are some potential surprises that could upend this thesis Because recently we've seen others buying into it, We've seen money going into investment grade bond funds. It's been a sweet spot of sorts over the past a month or so. What's the risk to this view? Peter? So, the first and foremost risk to any bond portfolio is

higher interest rates. But I think given the current regime and the fact that the FED actually paused because we don't really see any price pressures, I think the Fed is going to continue to stay on on the sideline and be very watchful, and I think that risk is eliminated. The other risk is volatibly coming back into the market from some unforeseen source where there's large draw on on on debt because people want to buy equities. For that, equities would have to sell out, So I don't really

see it anytime soon. So, but Christna, I guess that it raises a question is the FED more in control here? Is the FED more important or is it the e c B and the b O J And the fact that the amount of negative yielding debt has surged to a new post high. Well, so I think the FED was the most important central bank for I'm a pivot standpoint in two thousand, two thousand eighteen because they were the furthest along on the tightening cycle. So them pulling back I think was very very important on a go

forward basis. FED is a is in it for a ride. Effectively, they don't control anything. They're basically going to be reacting to whatever happens in the marketplace. People who are central banks that can actually be far more proactive as to reactive is probably ECB and Bank of Japan. FED is at the end of the day the most important central bank, but right now it's not in control of anything, not

in control of anything. That's reassuring, Uh, Peter, give us a sense within the investment grade space kind of where you guys are um seeing value today versus maybe some others. Okay, Like so I mentioned before, Uh, good quality corporate debt not necessarily single a rated but still investment great. Uh, good asset bags their industry sectors, I mean, are you tis true? But I mean I'm looking at financials, health, healthcare,

those types other sectors. Are you like? Sure, as regulated as the financial companies are today, there is always a good value post on nine. Okay, No, that is not a US company. I know they operate here, but that is not a US company. Uh. But the main thing is that there's good that it's been picked over. You have to be very careful at this point in the credit cycle, but doesn't mean there aren't any deals to be gotten Christmas. Since you're here and you oversee all

fixed income, what about how yelled at this point? Well, so, I think how you represents good value. It's not as good value as it was let's say three or four months ago, but still still pretty good value. I think the question you have to ask yourself is how are you going to source income in this environment where overall

policy rates and nintenior treasury rates are relatively low? And for that you'll have to take meaningful amount of risk because otherwise you'll be you know too and change percentage the maximum amount of yield that you can generate, and you need four percent five percent, what are you gonna do? High yield is one, loans is another. And emerging market local currency debt I think is still still good value. You know, because think about it from a global perspective,

there are two certainties. Inflation on a global basis is still going down, and emerging market real yields are still meaningfully higher than what you can find on the on the developed market. So that is over the next two or three five years, real yields and emerging markets are going down. Uh and uh I. I think the overall nominal rates and emerging markets are probably going down as well,

So it's a good environment for emerging market debt. Christian Money, chief investment officer and head of fixed to come at an Oppeniver and Have Funds, and Peter Stokowski, portfolio manager also at Oppenheimer Funds, joining us here in our Bloomberg Interactive Broker Studios, thank you so much celebrating their tenure anniversary of the firm's investment grade debt TIVA. They help oversee or they do oversee, the Oppenheimer Total Return Bond Fund.

Thanks for listening to the Bloomberg P and L podcast, you can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm Pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio