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Second Brexit debate might sound different if held above the hum of European recovery

Following what could be termed by many as a lost decade in a debt-laden eurozone, the medicine administered by the European Central Bank (ECB) has dragged the eurozone back from the brink, and ensured a smooth shifting through the economic gears.

From a fresh position of strength, we expect growth in the eurozone to hit 2.5pc in 2018, a post-crisis high.

However, with European inflation being the perennial laggard, the first rise in ECB interest rates may arrive a touch sooner than current market pricing implies, but not until Q2 2019 at the earliest.

Meanwhile, a gradually deteriorating UK economic picture could possibly turn public sentiment to such an extent that one wouldn’t rule out a national desire for a volte face on Brexit, a U-turn, or ‘EU-turn’, of sorts.

The economic performance choreographed by ECB president Mario Draghi and his colleagues should allow a gradual shift to monetary policy ‘normalisation’ later this year.

The ‘business as usual’ model follows a familiar playbook with the US Federal Reserve moving first, while other major central banks watch, wait and eventually follow.

With that ‘normalisation’ in mind, and with the US Fed planning to run down its QE holdings more rapidly over 2018, one question is what impact this will have on US equities?

With global interest rates still at close to all-time lows, we feel that equity markets, and US markets in particular, will continue to attract investment.

It could have been very different, though, for the eurozone and the grand European project, and only 12 months ago an infinitely less attractive scenario could well have been played out.

As 2017 dawned, the shock Brexit and Trump anti-establishment victories were not just fresh, but raw in collective memories, at a time when some very crucial European elections rapidly approached.

The Netherlands, France and Germany were due to go to the polls.

The pertinent question on everyone’s lips was: “Could a hard-fought, renewed European [financially at least] stability be torn asunder by a rising populist right?”

Unfortunately, the cold, hard answer to that question was ‘yes’.

Thankfully, these key elections and a barrage of other key global plebiscites are out the way and, as such, geopolitics, while still crucial, should be lower down the ladder of key risk events, adding to the theme of normalisation.

A while off yet, but the November 2018 US mid-terms may be important; the Republicans maintaining control of the House and Senate is far from guaranteed.

If they suffer losses, questions will be asked about what remains of President Donald Trump’s agenda.

Moving closer to home, political challenges are likely to continue to dominate throughout 2018 in the UK, where the Brexit negotiating task remains positively gargantuan.

If the recent past is anything go by, news-flow here may be ‘lumpy’ at best, with both violent lurches in progress and setbacks in talks before a likely sign-off on a transition arrangement and, ultimately, a final trade deal is concluded.

In light of this uncertainty, investors may spend more time in 2018 considering the possible implications of a future administration that is led by Jeremy Corbyn.

Would a Corbyn-led government be the catalyst for an EU-turn?

It is hard to counter the view that Brexit was put to the UK electorate in the worst possible fashion and at the worst possible time; with Europe emerging from its near decade of rolling financial crises, mass pan-European immigration issues resulting in a renewed nationalistic fervour, and some egregious misinformation on the part of the UK political classes.

With Europe now in a substantially safer place, and with the follies of Brexit laid bare, it’s fair to ask, would a fresh vote end differently?

As a novice optimist, that question certainly gives me pause for thought.

Justin Doyle is a treasury dealer at Investec, with offices in Dublin and Cork.

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