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Brexit : what will happen if there is no deal between UK and Europe?

What happens after the end of the transition period (31 Dec 2020) is a major political uncertainty. As we write, a number of EU-UK divergences must still be cleared before a trade deal can be secured. Moreover, tensions have recently flared up over the UK’s Internal Market Bill.
While we acknowledge that the “no-deal” risk has risen and can rise further in the coming weeks, our base case remains a suboptimal trade deal (an FTA for goods and some provisions for services) before year-end. With no customs union, this deal would not prevent trade frictions.
Should they fail to reach a trade deal, the EU and UK would probably agree on temporary shock mitigation measures, so that all trades are not conducted under a “raw” WTO regime in all sectors as soon as 1 Jan 2021. However, there would still be a major hit to trade and growth, and probably more severe for the UK than for the EU. As
such, we see no-deal Brexit as a negative for the GBP.

US elections: what scenario after Joe Biden or Donald Trump ?

While national and “swing-states” polls show Biden leading, the confidence margin is thin, especially judging from the experience of 2016. Regarding Congress, the House of Representative is likely to retain its Democrat majority, but the Senate race is too close to call.
Short term, markets may worry first and foremost about the risk of a disputed election. There may be no clear winner on 3 November. We expect a record turnout, with the highest number on record voting by mail which the incumbent President considers unreliable. There is no fully predictable legal process to sort the issue; given the backdrop of extreme polarization, political uncertainty may remain very high in the weeks after the election.
There are three main themes in Trump’s campaign: law and order, China, and Biden’s fitness for office. Biden is campaigning on economic policy (Build Back Better), healthcare, racial justice and morality. Biden is planning another fiscal stimulus package to address economic issues tied to the pandemic. Also, he has plans for a major infrastructure investment and supports Green New Deal. Biden plans to boost Obamacare and prescription drug reform. Both candidates will have to deal with the long-term issue of rising inequality. For markets, Trump supports tax cuts while Biden backs higher spending and tax hikes. As such, there is a near consensus among investors that a Trump victory would be beneficial for equity markets in the short run, while a Biden presidency would cause a market correction. But this may well be a short-sighted view. Their proposals will only be able to pass through Congress if the House of Representatives and Senate are of the same colour, which seems rather unlikely. On the other hand, the macro financial context is very different from what it was four years ago.
In addition, the US elections will have geopolitics implications. In particular, the relationship with the European Union could evolve in case Joe Biden is elected. (For more details see: US election: how it will impact the economy and financial markets)

Europe: is there a risk of another European debt crisis?

This is very unlikely in the short term. A consequence of the crisis is that both public and private debt levels are rising (corporations account for most of the rise in private debt). But public debt is for the most part absorbed by central banks’ purchase programs, meaning no additional net supply of bonds in the short term.
This additional public debt held by central banks doesn’t lead to short term sustainability issues either: interests (when positive) remain in the public sector i.e. they contribute to central banks capital, in general a property of the Treasury, and the central bank has the option to rollover the securities at maturity. So that there is neither reimbursement constraint for the government nor a need for market net incremental refinancing.
However in the long term, Europe needs a combination of higher nominal growth, balanced budgets and debt mutualisation for the debt risk to dissipate. High debt ratios are not a short-term risk, but diverging debt trajectories among European countries could lead to renewed tensions within the EU, especially when all countries return to pre-crisis GDP and unemployment levels. A (new?) framework for the fiscal rules that each country commits itself to respect will then have to be established at some point. It is therefore essential that the additional debt be used to finance not only investment projects but also reforms that improve productivity growth in the medium term.
As far as the incremental private debt is concerned, it is mostly backed by state guarantee schemes for at least two years.
Therefore, if the economy rebounds, corporate leverage should shrink. Many corporations have also built important cash buffers during the crisis. For those who do not have access to capital markets, banks interest rates are very low and state support of viable corporations reduce solvency risks. Nonetheless, we expect rising defaults from companies that were fragile before the crisis and whose business models will continue to struggle in the coming months.