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British Prime Minister sees ambush on Brexit plan this week.

Week in review: Brexit ambush

This week: An ambush of British Prime Minister’s Brexit plan, U.S. tariffs on China see muted market response and Starbucks in tax game.

Well, that was ugly. British Prime Minister Theresa May met up with European Union (EU) leaders this week in Salzburg, in order to try to sell her latest version of Brexit, AKA the Chequers plan. As ever, the Irish Border was the main sticking point.

But May seemed quietly confident. The mood music on the lead-up was encouraging, the group photo relaxed. And then came the broadside, courtesy of European Council President Donald Tusk, who declared Chequers “would not work.” With three words, he effectively blew May’s plan – an EU-UK free trade area covering goods and agriculture – out of the water.

Piling on the pain, Tusk added that “the moment of truth” would be a summit on October 18. In other words, the UK has four weeks to come up with a workable solution on the Irish border question or talks are essentially kaput.

In the following press conference, a “furious” May doubled down on her Chequers plan, calling it the only “serious and credible” option. Jacob Rees-Mogg, the anachronistic back-bench Brexiteer, had a different view: “Chequers goes pop” was his rather snarky tweet. With both Remain and Brexit camps mobilizing in the wake of the defeat, next week’s Tory Party conference promises to be a belter.

Just a blip?

Back in dear Blighty, there were more surprises awaiting May, this time in the shape of inflation. Prices unexpectedly jumped to 2.7% in August, up from 2.5% the previous month. Many economists had forecast a drop to 2.4%. Rising inflation at a time when economic growth is mediocre (at best) will no doubt concern the Bank of England (BoE).

For one thing, the Bank might have to raise interest rates faster than it would like. This could include as early as next year, at a time when Brexit (hard or soft) looms ever-larger. However, some commentators were more sanguine, pointing out that the primary drivers of price rises – a fun-for-all-the-family triptych of computer games, theatre and fashion – are notoriously volatile and prone to monthly blips. We’ll know more when the BoE releases its November inflation report.

It’s like déjà vu all over again

Normally, the President of the United States slapping a 10% tariff on $200 billion of Chinese goods would be a “yuge” deal. Similarly, China retaliating with a 10% tariff on $60 billion worth of U.S. imports would be an even “yuger” deal.

But, alas, we live in strange times, and the latest tit-for-tat exchange in the countries’ trade spat was met with shrugs all round. Why the muted market response?

First, the latest tariffs were widely telegraphed and already heavily priced into markets. Second, the economic impact of tariffs thus far has been fairly limited (the latest tariffs on China would account for only 0.1% of its economic output).

Third, considering the options available, China’s response was fairly restrained. And lastly, given all that bluster, markets, like the rest of us, are probably suffering from a mild bout of “tariff fatigue.” As we said, strange times.

“Don’t hate the playa, hate the game”

We very much doubt Ice-T, the legendary Newark rapper/producer/actor, had the minutiae of UK corporation tax in mind when he penned the above rejoinder. But the sentiment may still stand. For, this week, it emerged that coffee giant Starbucks paid a  2.8% tax on its £162 million UK profits for the year to end-October. (That’s about $213 million.) Cue obligatory howls of protest. And, to be fair, the howlers have a point: UK corporation tax is 19.5%. All things being equal then, Starbucks should have paid £31.6 million ($41.6 million) as opposed to £4.5 million ($5.9 million).  

So what gives? First, the overall bill was partly reduced thanks to a tax break related to employees being paid in Starbucks stocks. There were additional tax breaks too, including “the tax effect of expenses that are not deductible in determining taxable profit.”

Starbucks soon made its position clear: “The company pays all its taxes and meets all international tax standards and regulations.” Fair enough. So, rather than blaming Starbucks, perhaps it’s time to “hate the game.”

On the markets

Japan’s Topix was the standout index this week, returning 3.4%. This was driven by news that Prime Minister Shinzo Abe had been re-elected president of the ruling Liberal Democratic Party.

Japan’s Topix was the standout index this week, returning 3.4%.

Abe is now assured to remain prime minister, giving him a fresh mandate to push through his reform agenda. Elsewhere, markets eked out modest gains: the FTSE World Europe was up 1.2%, while the FTSE 100 and S&P 500 both delivered 0.9%.

And finally...

Morning rush-hour traffic was brought to a standstill on Southlake, Texas this week.

The cause? A marauding herd of cattle. Local police, conscious that the “steaks” were high, were soon on the scene and quickly “moved” the beast along. "Our officers located the owners of the cows and they've been reunited and it feels so good,” read the resultant tweet.

Important Information

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Companies mentioned for illustrative purposes only and should not be taken as a recommendation to buy or sell any security. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list.

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Image credit: INTERFOTO / Alamy Stock Photo

ID: US-210918-73096-1